July 12, 2017 / 8:36 AM / 5 months ago

Labour market data soothes sterling as Brexit challenges mount

LONDON (Reuters) - Slightly better than expected wages and jobs data saved Britain’s pound from another downward lurch on Wednesday, offsetting a series of political and economic warning signs as talks on leaving the European Union get going in earnest.

Ratings agency Moody’s said in a statement late on Tuesday that the United Kingdom’s creditworthiness was under pressure following last year’s vote to leave the EU and the ongoing uncertainty over the outcome of negotiations with Brussels.

That comes at a time when the Conservative government is under pressure, following the shock loss of its majority last month. The likely next leader of the pro-EU Liberal Democrats, Vince Cable, said on Tuesday that Britain was heading towards a new economic crisis which could raise popular support for anti-Brexit parties.

At the same time, indicators have suggested the British economy is already struggling to gain momentum after a sluggish start to the year, while consumer and business sentiment has soured.

Amid the resulting falls in the pound, several of the Bank of England’s monetary policy panel members have stepped in to warn that they may raise rates soon, temporarily lifting the currency before it slipped back.

“I really have not liked sterling for a while,” said State Street’s head of macro strategy for Europe, the Middle East and Africa, Tim Graf. “The consumer is not taking up the slack as... previously.”

“The only thing that has been supporting the pound is the idea that the BoE might hike rates. If we continue to see (weak data), I can’t see how they can.”


BoE Deputy Governor Ben Broadbent said in a newspaper interview published on Wednesday he was "not ready" to raise rates yet, driving sterling to a two-week low against the dollar and 8-month low against the euro GBP=D3 EURGBP=D3 in early trade before the labour market report improved the mood.

FILE PHOTO: Workers clean windows over looking Docklands Light Railway in Canary Wharf, London, Britain July 5, 2017. REUTERS/Dylan Martinez/File Photo

The data showed British workers saw their pay fall further behind inflation in the three months to May, though wages rose marginally more than had been expected.

“For anyone who had any expectation of an August hike - that is clearly looking very unrealistic now,” said MUFG analyst Lee Hardman, while adding: “He does reinforce that they are moving towards a hike. That will help keep alive expectations for a move later this year.”

By 1430 GMT, the pound was trading 0.4 percent stronger on the day at $1.2889, having earlier weakened to $1.2812. It jumped as high as $1.2910 briefly after U.S. Federal Reserve Chair Janet Yellen dampened expectations of more than one interest rate hike for the rest of the year, before easing back.

FILE PHOTO: An employee works on a checkout till at the Asda superstore in High Wycombe, Britain, February 8, 2017. REUTERS/Eddie Keogh/File Photo

It also gained almost 1 percent to hit 88.39 pence per euro EURGBP=, recovering from an eight-month low against the single currency.

Sterling fell back as low as $1.26 in the two weeks after Prime Minister Theresa May unexpectedly lost her parliamentary majority in last month’s snap election, but it remains some 10 cents above lows hit in a flash crash last October.

Top executives at five of the largest banks in London told Reuters a staggered deal on leaving the EU is only likely to be agreed late on in talks with Brussels, meaning they have already begun relocating staff.

With those sorts of Brexit-related blows potentially in store for the months ahead, many economists say the British economy is far from ready to deal with higher interest rates and much recent data continues to weigh against the pound.

However, Nomura strategist Jordan Rochester, one of the market’s most prominent sterling bulls, predicted the currency would reach $1.37 by the end of this year.

He said Broadbent’s words still left room for officials to opt at the August meeting to remove the extra emergency stimulus given to the economy after the Brexit vote last year.

That would prod interest rates back to 0.5 percent and offer some support to the pound.

Additional reporting by Abhinvan Ramnarayan and Saikat Chatterjee; Editing by Gareth Jones

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