February 2, 2018 / 10:44 AM / 10 months ago

Sterling extends losses after U.S. jobs data; central bank eyed

LONDON (Reuters) - Sterling extended losses on Friday and fell to the day’s lows after a U.S. report showing wages rose at their fastest clip since 2009 hit the currency which was already struggling thanks to weak data from Britain’s construction sector.

A British ten pound note is seen in front of a stock graph in this November 7, 2016 picture illustration. REUTERS/Dado Ruvic/Illustration/File Photo

U.S. job growth surged in January and wages increased further, recording their largest annual gain in more than 8-1/2 years, bolstering expectations that inflation will push higher this year as the labour market hits full employment.

“Sterling is feeling the heat from the dollar move across the board but markets are cautious about betting excessively against the pound before next week where the BOE may surprise markets,” said Lee Hardman, an FX strategist at MUFG in London.

Sterling slipped to the day’s low of $1.4137 after the data, down around 0.75 percent on the day. It was also 0.4 percent weaker against the euro, at 87.975 pence.

For the week, sterling was still up 1.5 percent against the dollar. Analysts say the currency is being supported by a repricing of Bank of England interest rate hike expectations - several banks are now calling for a rise to come in May, and for another to come later in the year.

That follows testimony on Tuesday from BoE Governor Mark Carney, who sounded a more upbeat tone than previously, saying wage growth was finally picking up and that the focus of the BoE is shifting back to tackling above-target inflation.

“There does seem to be a will in the Bank of England to reduce policy accommodation. If it weren’t for the Brexit-related risks, I would be very confident that they will (hike) twice this year,” Rabobank currency strategist Jane Foley said.

Britain’s construction sector came close to contracting for the first time since September last month as uncertainty linked to Brexit caused new orders to dry up, data showed.

Sterling has also been helped in recent weeks by a lack of major bad news around Brexit, analysts say. Markets largely brushed aside talk of a leadership challenge to British Prime Minister Theresa May, as well as a House of Lords report that said her Brexit legislation plans contained “fundamental flaws”.

Data last week showed speculators added to their bets on the pound strengthening further in the most recent week, with net-long positions at their highest since mid-2014.

“While the front-end BoE rates market has sold off plenty and sterling has moved significantly higher (against the dollar), we think both moves have further to go,” Nomura currency strategist Jordan Rochester wrote in a note to clients late on Thursday.

The BoE’s Monetary Policy Committee is seen as almost certain to keep rates at 0.50 percent when it meets next week, however.

Reporting by Jemima Kelly and Saikat Chatterjee; Editing by Peter Graff

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