LONDON: Sterling edged higher on Wednesday ahead of the next day's Bank of England policy meeting, which will be closely watched for clues on the future path of UK monetary policy.
While the BoE is widely expected to keep interest rates on hold at 0.5 percent on Thursday, after raising rates for the first time since 2007 last month, there are questions over whether rates will be hiked again next year - and if so, at what pace.
The Bank said in November that inflation was near its peak and would then fall slowly over the next three years to just above 2 percent. It also said a long-awaited pick-up in wage growth was likely next year.
But inflation data released on Tuesday exceeded expectations, coming in at 3.1 percent annually - more than 1 percent above the BoE's 2 percent target.
"The BoE meeting tomorrow is possibly pivotal if (Governor Mark)Carney can ... take a more hawkish stance and wax hawkish on the inflationary risks if sterling falls further," said Saxo Bank strategist John Hardy.
Numbers released on Wednesday showed workers' total earnings, excluding bonuses, rose by an annual 2.3 percent during that period, compared with 2.2 percent in the three months to September. That beat economists' expectations for no improvement, but was still well below the inflation rate.
Sterling traded up 0.4 percent at $1.1367.
The pound got only a temporary lift after Tuesday's data showed British consumer price growth unexpectedly hit its highest level in nearly six years in November, tightening a post-Brexit vote squeeze on households whose spending is the main driver of the country's economy.
"The real wage squeeze continues, and that has a dampening impact on the economy and growth, given the UK economy's dependence on consumption," said Societe Generale currency strategist Alvin Tan.
Against the euro, the pound climbed 0.2 percent to trade at 88.02 pence.
Wednesday's data also showed the unemployment rate held unexpectedly at its four-decade low of 4.3 percent, against expectations for a further decrease to 4.2 percent in a Reuters poll of economists.
As well as the Bank of England, traders are also eyeing retail sales data due on Thursday, and are watching out for any Brexit developments.
Prime Minister Theresa May warned rebellious lawmakers in her own party they could endanger Britain's smooth exit from the European Union if they tried to change her Brexit blueprint later on Wednesday.
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