LONDON (Reuters) - Sterling fell on Wednesday after posting its biggest daily gain in more than two months the previous day as investors took profits before a central bank meeting on Thursday that will have to grapple with divergent data in recent days.
Inflation surged above the central bank’s 2 percent target in August, rising to its highest in more than five years, a report on Tuesday showed. But wage growth in the three months to July undershot market expectations, another report showed on Wednesday.
A bigger driver for sterling over the medium term will be the progress of the Brexit negotiations, investors say.
“Sterling really could go down 15 percent or up 15 percent over the next two years, depending on the outcome of talks,” said Trevor Greetham, a multi-asset fund manager at Royal London Asset Management.
Britain’s parliament voted early on Tuesday to move the government’s European Union withdrawal bill - or repeal bill - to the next stage of a lengthy lawmaking process.
EU and Britain had agreed to move the next round of Brexit talks to the week beginning Sept. 25 - from Sept. 18 - because of the British political calendar.
The pound slipped from a one-year high of $1.3329 in morning trade to trade 0.4 percent lower on the day at $1.3234. But it was broadly flat on the day against a weaker euro at 89.98 pence per euro.
“Ultimately what the wage data did was to shift the focus to tomorrow’s BoE meeting and really, the big question is how concerned is the central bank about a 2.9 percent inflation rate,” said CMC chief markets analyst Michael Hewson.
Two members of the Bank’s Monetary Policy Committee are already voting for higher rates. Any more defections when the MPC meets on Thursday could push sterling higher, and there has been talk chief economist Andy Haldane might shift to that camp.
But with the economy struggling, many traders doubt the Bank’s will raise rates at all. Markets are expecting only one rate increase by the end of next year. <0#BOEWATCH>
“The BoE is in an unenviable position heading into tomorrow’s MPC meeting, given that inflation is above target but the latest wage and investment data show that the economy is hardly going through a demand-driven boom that needs an immediate monetary response,” said Ranko Berich, head of market analysis at Monex Europe.
Reporting by Ritvik Carvalho and Saikat Chatterjee, editing by Larry King