Sterling gains after Carney says turning back to inflation fight

LONDON (Reuters) - Sterling rose on Tuesday after Bank of England Governor Mark Carney said the central bank was turning its focus back to bringing down inflation, supporting investors betting that the central bank would rein in monetary policy faster than expected.

A British Pound Sterling note is seen in this June 22, 2017 illustration photo. REUTERS/Thomas White/Illustration

Carney said in a speech that there was a “gradual firming” in the private sector and that a pick-up in wages over the next few years appeared to be on track, helping the bank move to the more conventional business of bringing down inflation.

The BoE has indicated before that it is unlikely to raise interest rates further until wage pressures grow.

The quarterly inflation report, due next week alongside the BoE’s first rate decision of the year, could signal a shift with the bank focusing on a healthier outlook for economic growth rather than worrying about “stagflation”, Credit Agricole’s head of G10 FX Strategy Valentin Marinov said.

“It seems that he has confirmed the sense that a tightening labour market could lead to accelerating wage growth,” he said.

“It did feel as if [Carney] was being more constructive.”

Marinov said end-of-monthly flows out of a broadly weakening dollar, as well as the unwinding of corporate sterling hedges sterling, had also boosted the pound.

Sterling is enjoying a strong start to 2018, helped by optimism that the UK can win itself more favourable terms when leaving the European Union, as well better-than-expected economic data.

The pound rose 0.5 percent to $1.4143 and 0.3 percent against the euro to 87.715 pence per euro.

Still, political uncertainty in Britain around Brexit remain decisive factors in the direction for sterling.

The pound had earlier on Tuesday fallen to a one-week low against the dollar and below $1.40, a key level, after a leaked government analysis claimed Britain would be worse off after Brexit in every scenario.

Britain is due to exit the EU on March 29, 2019, but there are deep divisions inside Prime Minister Theresa May’s government and party about what sort of relationship should replace 46 years of membership.

Those divisions have worried sterling investors this week, especially with Britain signalling that there is more work to be done before it can agree a transition deal.

Some analysts said sterling had gotten ahead of itself in its recent rally given the difficult negotiations that remain.

“Everything is pointing towards tough negotiations and major disagreements within the British government,” Commerzbank analysts wrote in a note.

“BoE Governor Mark Carney’s speech in front of Parliament is unlikely to change that today since he won’t sound hawkish due to the Brexit risks and therefore won’t give the market any justification for rate hike speculation. Accordingly, I remain cautious about sterling.”

Reporting by Tommy Wilkes and Saikat Chatterjee; Editing by Abhinav Ramnarayan and Matthew Mpoke Bigg