Sterling drops after UK data shows softer wage growth

LONDON (Reuters) -Sterling fell on Tuesday after data showed growth in average British earnings slowed slightly in the three months to August, suggesting the Bank of England may be able to continue cutting interest rates, albeit at a very cautious pace.

The pound was last down 0.5% against the dollar at $1.3279 , having traded in modestly positive territory before the data was released.

It also softened against the euro, which was up 0.5% at 87.18 pence, on track for its biggest daily jump in nearly a month.

Average weekly earnings, excluding bonuses, were 4.7% higher in the June-August period than a year earlier, the Office for National Statistics said, slightly weaker than an increase of 4.8% in the three months to July and the slowest since May 2022.

In the private sector alone - watched closely by the BoE - earnings excluding bonuses rose by 4.4% in the three months to August, while the jobless rate edged higher to 4.8%.

"While all data are subject to revision (and should be taken with a pinch of salt), one thing is clear: slack continues to build in the labour market," said Sanjay Raja, Deutsche Bank's chief UK economist.

He said the data should 'give ammunition' for the doves on the BoE's rate-setting monetary policy committee - those who typically lean towards lower interest rates - while providing the centrists on the MPC with "some food for thought".

"We continue to think that a (fourth quarter) rate cut may be underpriced by markets," he said.

Markets are not fully pricing a further BoE rate cut until March, but see around a 40% chance of a cut in December.

Yields on British government bonds also fell, with the 10-year gilt yield down 5 basis points at 4.61%, falling slightly more than European peers.

Gross domestic product data due later in the week, along with inflation data next week, will offer further indications about the health of the British economy and the prospect of further BoE rate cuts.

(Reporting by Alun John; Editing by Amanda Cooper and Gareth Jones)