Sterling edges down as traders eye inflation data

LONDON (Reuters) - Sterling edged down on Wednesday to its lowest in almost two weeks against the dollar, as investors locked in profits after a rally and showed reluctance to push it any higher until they see major new catalysts.

UK pound coin drops into yellow watercolour in this illustration picture, October 26, 2017. REUTERS/Dado Ruvic/Illustration

The pound climbed to a 3-1/2-month high at the start of the month, continuing an optimistic mood late last year after Britain successfully reached a deal with the European Union for exit talks to move on to discussions of a transition period and post-Brexit trade.

But it has since struggled, with investors saying that for the currency to break out of the $1.30-$1.36 range that it has traded in for the past few months, it would need significant new developments - be they political or economic.

It edged down 0.1 percent on Wednesday to $1.3527, having earlier fallen to as low as $1.3482 but having recovered as the dollar weakened across the board.

Japanese bank MUFG is bullish on sterling, seeing it at $1.40 by the end of the first quarter, but said that was dependent on real wages recovering.

“Our bullish outlook for the pound in 2018 assumes that the squeeze on real wage growth - that undermined economic activity in 2017 - will start to reverse this year as wage growth picks up,” they wrote in a note to clients.

Earlier, data showed British industrial output rose by a monthly 0.4 percent in November, compared with 0.2 percent in October, spurring an annual rise of 2.5 percent, but that had little effect on the pound.

“The data is mildly supportive for sterling but the big one would be UK inflation data next week and any news on Brexit negotiations,” said Viraj Patel, an FX strategist at ING in London.

Against the euro, it has been a more mixed picture, with sterling oscillating around the 88 cents line over the past month as the pound regained some momentum against the single currency.

A spike in inflation data, due next week, would push the pound up further as markets start repricing expectations of the timing of the next rate hike from the Bank of England after it first raised interest rates last November.

Currency markets expect UK interest rates to rise only by the second half of 2018. A Reuters poll in December expects the next hike only in the fourth quarter of 2018.

Despite the cautious views on the timing of the next rate hike, investors have warmed to the bullish sterling theme in recent weeks on expectations of some progress in Brexit negotiations.

Net long bets on sterling are near their highest levels in more than three years, according to data released by the U.S. Commodity Futures Trading Commission on Friday.

Reporting by Saikat Chatterjee and Jemima Kelly; Editing by Alison Williams