LONDON: The British pound weakened on Wednesday after inflation fell more than expected in September, easing a squeeze on consumers, who are also seeing the strongest wage growth for workers in a decade according to other data.
The better-than-expected wage figures on Tuesday had pushed the pound higher and briefly redirected attention to the British economy and away from Brexit negotiations and this week's European Union leaders' summit.
But weaker-than-expected consumer price data, which came in at an annual rate of 2.4 percent in September versus forecasts of 2.6 percent, pushed down a pound already weakened by a BBC report that Britain would not seek to extend the Brexit transition period.
"Sterling came under a little pressure, but in truth it was already under pressure after the suggestion that there wouldn't be an extension," said Neil Mellor, a strategist at BNY Mellon.
"As important as the data is, the market is still focused on Brexit," he said.
The pound, trading down 0.3 percent at close to $1.3150 before the data was released, fell to as low as $1.3125 .
Against the euro, sterling dropped to 88.06 pence , down 0.3 percent on the day.
WAGE INFLATION
The Bank of England has said tighter monetary policy depends on Britain agreeing a trade deal with the EU. But it also wants to see signs of more wage growth, which could feed through to inflation.
Nomura economist George Buckley said that faster wage growth should eventually lead to a faster pricing of rate hikes.
"With Brexit uncertainty high, the market won't price that immediately, but if wages maintain this momentum, a sharp upward shift in rates pricing will follow in due course, we think," he wrote in a note to clients.
Money markets are not fully pricing in a 25 basis-point hike from the BoE until November 2019.
Analysts say Britain will need to see a period of strong wage growth before the BoE begins to act.
The pound, although relatively stable in recent days, remains at the mercy of the negotiations - this week's EU summit was supposed to herald a breakthrough in talks for a deal with Britain to shape future trading relations.
But EU leaders are set to give Prime Minister Theresa May a tough reception in Brussels, warning her to rally support at home for the Brexit deal on offer or be cut loose without one in March.
"If you start to get economic data seriously out of line with expectations you should get some big moves (in sterling)," BNY Mellon's Mellor said. "But at the moment it's a case of spinning plates."
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