Sterling retreated from a 26-year high against a broadly weaker dollar on Wednesday after minutes of the Bank of England's last rate-setting meeting revealed a split vote for this month's hike in line with market expectations.
But initial slippage in the pound was limited as it benefited from pressure on the greenback, which fell to 12-year lows against a basket of major currencies, due to concern over the US subprime mortgage market. Fed Chairman Ben Bernanke in Congressional testimony on Wednesday said problems in housing may get worse before they get better.
Sterling was also supported by labour market data. While average earnings growth was subdued in the three-months to May, the number of people claiming unemployment benefit fell more than expected in June. "The employment data was pretty positive (for sterling), but the wage figures show the MPC hasn't got a great deal to worry about," Neil Mellor, FX strategist at Bank of New York, said.
The BoE's minutes showed a 6-3 vote in favour of raising rates to 5.75 percent in July, as expected, but didn't materially alter expectations for rates to rise again this year.
"The MPC minutes were slightly more dovish than people had expected. Charles Bean, the BoE's chief economist, didn't vote for an interest rate rise - whereas the market expected him to vote - (that) surprised the market," Paul Robinson, currency strategist at Barclays Capital, said.
A Reuters poll released on Wednesday showed that 30 out of 55 economists saw British rates rising to 6.0 percent this year but only three of them expect the move to come in August. At 1425 GMT, the pound was up 0.2 percent on the day at $2.0511 having hit a 26-year-high of $2.0548 earlier. The euro was down 0.1 percent at 67.26 pence.
Following the release of the BoE minutes, analysts said the major focus would now be the BoE's quarterly inflation report, due out in August. "The August Inflation Report (is) very important to see if the forecast round can bring some consensus and to see if the MPC continue to 'validate' the quite aggressive path priced into markets or hint that we are reaching the peak," Lehman Brothers analyst Peter Newland said.
British retail sales data for June are due for release on Thursday at 0830 GMT. Retail sales are expected to increase 0.3 percent on the month and 3.5 percent for the year, according to Reuters data.
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