Sterling struggled to find a firm foothold on Monday after hitting a 14-month low last week, with investors expecting little in this week's Inflation Report and wage data to suggest that interest rates will rise soon. If Wednesday's wage data shows subdued growth, as expected, that would firm up market expectations that the first rate hike from the Bank of England since 2007 is unlikely to come before the second half of 2015, keeping sterling under pressure.
The Bank's quarterly Inflation Report, due on the same day, could provide mixed signals. A downward revision to near-term inflation forecasts on lower energy and food prices is likely to be accompanied by upward revisions to longer-term forecasts. Economic growth projections might be tweaked lower to factor in renewed uncertainty from the euro zone, which is facing a slowdown and the threat of deflation, analysts said.
Daragh Maher, a currency strategist at HSBC in London, said Wednesday's key releases were likely to highlight the dilemma facing policymakers: slack being used up in the labour market but few signs of price and, crucially, wage pressures. "What you're looking for is something that's going to buck the trend, which means either a reasonably consistent run of upside surprises in UK data or some marked hawkish shift in the language," said Daragh Maher, FX strategist at HSBC.
"The problem (for sterling) is that markets feel comfortable that we're not going to get that this week." Investors have pushed back expectations for a first rise in British rates from this year into the second half of 2015, sending the pound down 8 percent against the dollar since mid-July. The BoE kept rates unchanged last week.
Sterling was flat at $1.5867, not far from its trough of $1.5791 hit on Friday. And traders do not expect the pound to push much higher before Wednesday. "If sterling/dollar does move to the upside before then, it will be due to further profit-taking on the dollar," said Jameel Ahmad, chief market analyst at FXTM. The euro was slightly weaker against sterling at 78.375 pence. British government bond prices were little changed, with the 10-year gilt yield down around a basis point at 2.20 percent at 1550 GMT.
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