Sterling Edges up Versus Dollar and Euro After UK Data

By Stefano Rebaudo

(Reuters) – Sterling edged up versus the dollar and the euro on Tuesday after UK labour data supported the view that the British economy was on a solid footing.

Pay growth cooled in the three months to July to a more than two-year low, and employment shot higher, according to data on Tuesday, which is likely to keep the Bank of England on track to cut interest rates again before the end of the year.

Analysts said inflation was converging towards the Monetary Policy Committee’s 2% target, while economic activity kept showing resilience, arguing that such a backdrop suggests a slow easing of monetary policy.

Investors will closely watch gross domestic product figures due Wednesday before this month’s Bank of England meeting.

Sanjay Raja, senior economist at Deutsche Bank, said the UK economy was likely to expand by 0.3% month-on-month after flatlining in June, as activity would rebound after a pick-up in retail and leisure services.

Sterling rose 0.1% to $1.3085, after reaching $1.3107 earlier in the session.

The dollar edged down on Tuesday before U.S. inflation data and the televised U.S. presidential debate, which could affect expectations for the interest rate outlook.

This (a resilient labour market and subsiding inflation) should support the argument that while BoE cuts are coming, the pace of rate reductions should be relatively gradual,” said Enrique Diaz-Alvarez, chief economist at global financial services firm Ebury.

The euro dropped versus sterling, trading 0.05% lower at 84.36 pence per euro.

After stalling in the last few weeks, any upside surprise to the UK data could open the door to the euro trading below 0.84 against the pound,” said Kit Juckes, macro strategist at SG Markets.

Wage growth is expected to slow to 5%, the GDP to grow by 0.6% quarterly and by 0.2% monthly, he added.

SG Markets’ Juckes said CFTC futures positioning showed further dollar selling at the start of last week, with longs in yen, sterling, and euro growing further.

The focus in the British rates market over the next few weeks will also be on the new Labour government’s first fiscal event on Oct. 30.

Banks in Britain are intensifying their lobbying against possible tax hikes in the new Labour government’s first budget next month, amid concerns it may tap the sector to boost public finances, senior industry sources told Reuters.

(Reporting by Stefano Rebaudo; Editing by Jan Harvey)