LONDON (Reuters) - Sterling on Tuesday vaulted to its highest level since Britain voted to leave the European Union in June 2016 as expectations swelled that the central bank will raise interest rates for the second time in seven months.
Though weaker than expected wage data pulled the currency back from those highs, markets were pricing in a more than an even chance of a May rate increase of a quarter of a percentage point.
“The new highs we’ve achieved on sterling add to the argument that the longer-term trend for sterling remains in an upward direction,” said John Goldie, an FX dealer at Argentex in London.
The pound rose against the dollar to a 22-month high, boosted by seasonal inflows from foreign companies sending dividend payments to British shareholders and diminishing concern about a disorderly exit from the EU next year.
After rising as high as $1.4377, the pound settled 0.2 percent down at $1.4310, still up 6 percent this year.
“Some profit-taking has come in at that level, but we believe the pound will continue higher in the coming weeks,” said Argentex’s Goldie.
Its rally was stymied by labour market data showing total earnings had risen by less than forecast in the three months to February, though few analysts expect the numbers to delay an increase in interest rates next month.
Wages rose by 2.8 percent, unchanged from the three months to January and weaker than a median forecast of 3 percent in a Reuters poll of economists.
Tuesday’s data is important because the Bank of England has signalled that it needs wage pressures to rise before it starts to boost rates to curb inflation.
“I don’t think this will change expectations about the May rate hike, but the way the pound fell after the data was released shows that the market is long on sterling, hedge funds in particular,” said Jordan Rochester, an FX strategist at Nomura.
He said that renewed risk appetite and continued dollar weakness had helped to keep the pound strong despite weaker than expected economic data this month.
Inflation figures due on Wednesday could shape views on whether the British economy can tolerate a second rate increase later this year, Rochester said.
Against the euro, sterling fell 0.1 percent to 86.26 pence, still close to 11-month highs.
Reporting by Saikat Chatterjee and Tom Finn; Additional reporting by Tommy Wilkes; Editing by David Goodman