February 15, 2017 / 10:51 AM / 5 months ago

Sterling drops after wage growth slows

3 Min Read

* Graphic: Sterling and gilt yields bit.ly/2dgAXn1

* Graphic: World FX rates in 2017 tmsnrt.rs/2egbfVh

* Graphic: Trade-weighted sterling since Brexit vote tmsnrt.rs/2hwV9Hv

By Yumna Mohamed

LONDON, Feb 15 (Reuters) - Sterling dropped to a one-week low of $1.2428 on Wednesday after data showed UK wage growth slowing in the fourth quarter, bad news for consumers facing a potential surge in inflation in the months ahead.

The pound, generally steady over the course of a month when the government debated the launch of formal talks on leaving the European Union, fell a third of a percent against the dollar after the report.

It 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.

"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.

Softer UK inflation data on Tuesday knocked sterling off its highest level in a month to the euro, suggesting to analysts that the Bank of England will not be looking to hike rates any time soon.

The BoE cut 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 that it will tighten monetary policy sooner rather than later.

Inflation data on Tuesday showed the fastest rise in consumer prices since June 2014, but the headline reading of 1.8 percent year-on-year was below economist forecasts of a 1.9 percent rise, dampening expectations of a rate hike in the UK.

CMC Markets chief analyst Michael Hewson put more emphasis on a 20 percent jump in the cost of materials and fuel for companies spurred by rises in world oil prices and the almost one fifth fall in the value of sterling over the past year.

"People are looking at the CPI number and saying inflation is nowhere near as strong as it should be, but that's not to say it won't hit the Bank of England (BoE)'s 2 percent (target) in the next couple of months," he said.

While rises in inflation will support expectations of a rise in the interest rate investors get for holding sterling, the concern is it will weaken British consumers spending if not matched by rises in wages in the months ahead.

"The question remains when the strong rise in input prices will finally be reflected in consumer prices as well," Commerzbank analyst Tathagata Ghose said in a note.

Sterling held near one-month lows against the euro at 84.68 pence.

Editing by Jeremy Gaunt

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