LONDON Sterling touched one-week lows against a broadly stronger dollar on Wednesday after U.S. consumer prices had their biggest jump in nearly four years and retail numbers beat expectations.
The U.S. Labor Department said the Consumer Price Index rose 0.6 percent last month after gaining 0.3 percent in December while the Commerce Department reported a 0.4 percent rise in January retail sales.
UK labour data released early in the session had already knocked sterling back, showing a slowing of wage growth in the fourth quarter that was bad news for British consumers facing a surge in inflation in the months ahead.
After falling as low as $1.2386 after the U.S. numbers, the pound recovered some ground to trade just 0.1 percent lower on the day at $1.2451 and 84.93 pence per euro respectively.
"This is more a dollar strength story, though sterling is a little weaker after the UK data," said CMC Markets chief analyst Michael Hewson.
The UK jobs report showed a 2.6 percent rise in average weekly earnings year-on-year in the fourth quarter of 2016, below a consensus forecast of 2.8 percent.
Unemployment fell and the number of people in work rose by 37,000 but the slowdown in wages growth spoke to growing concerns about how much consumers will support economic growth as talks on leaving the European Union get going this year.
"The jobs data continues to reflect the generally positive tone we saw through the second half of last year in the UK but we still think there are some risks on the horizon for the currency relating to triggering Article 50 (formalising Brexit)," TD Securities senior global strategist James Rossiter said.
The Bank of England cut interest rates to stave off any adverse impact of Britain's vote to exit the European Union last June, but the resilience of the UK economy since has fuelled speculation the BoE will tighten monetary policy sooner rather than later.
Against that is the fallout of last year's Brexit vote and the impact on household budgets and spending power of a 20 percent fall in the value of sterling and rising world oil prices.
Investors will now look to British retail data due on Friday to see how sentiment is holding up and whether an expected weakness in December was temporary or the start of a weakening trend for consumer spending ahead.
While the pound's moves this year have been dominated by Brexit updates, it appears that markets have now priced in the risk that the UK will make a clean break from the European single market.
The pound slumped by about a fifth in value against the dollar between December 2014 and last October but it has held in a range between 1.20 and 1.27 since.
One element investors are keeping an eye on as the government steers its way towards the formal launch of talks on leaving the EU next month is the fallout for Ireland and the Northern Irish peace settlement.
Irish Prime Minister Enda Kenny warned EU leaders on Wednesday that any talk of punishing Britain for leaving the bloc was deeply unwise and called for a transitional agreement to ease the damage likely to be caused by the split.
(Editing by Tom Heneghan and Ken Ferris)