Sterling weakened against the dollar and retreated from earlier three-month highs against the euro on Wednesday after slower-than-expected UK wage growth helped cool inflationary concerns. Average earnings grew an annual 4.0 percent in the period, compared with forecasts of 4.5 percent and a downwardly-revised 4.4 percent in the previous three months.
Investors had been braced for the data after Bank of England Governor Mervyn King said on Monday rates may need to rise again if signs of price pressures and capacity constraints stay high.
As such, the signs of slowing inflationary pressures in the labour market cast some doubt on how much further the BoE will need to tighten policy. By 1420 GMT sterling was down a quarter percent at $1.9690, moving towards last week's two-month low of $1.9621.
The euro rose to 67.48 pence, recovering from an earlier three-month low of 67.30 pence. "A lot of good news has been priced in," said Phyllis Papadavid, FX strategist at Lehman Brothers. "The market is already pricing in two rate hikes and there are a lot of factors weighing on sterling and we would look to sell into bad news."
UK interest rate futures showed little reaction and continue to price in two more quarter point rate hikes to 6 percent by the end of the year. The jobs data also pointed to continued strength in the labour market, with the number of people claiming unemployment benefit falling by a bigger-than-expected 9,300 in May.
Analysts said that in the face of a strong economy, the easing in wage growth should not prevent the BoE from hiking rates further from 5.5 percent. "The average earnings was a bit softer than expected but unemployment was better," said Niels From currency strategist at Dresdner Kleinwort. "If you look at the overall picture the market is speculating that the Bank of England will hike twice before the end of the year."