Sterling hits 7-year high against euro on strong wages data

LONDON: Sterling hit a seven-year high against the euro on Wednesday after data showed British wages growing strongly, outstripping inflation by the widest margin since before the financial crisis.

Minutes from the Bank of England's latest policy meeting showed pay -- watched closely by the Bank -- was rising faster than rate-setters expected. Though they still elected unanimously to keep policy on hold, two BoE policymakers voted to increase rates in the second half of the year.

British interest rates have been at a record low of 0.5 percent for six years, and investors reckon they could stay there for at least another year due to low inflation, even as the economy heads for its strongest growth in nearly a decade.

Average weekly earnings, including bonuses, rose 2.4 percent in annual terms in December, well above inflation of 0.5 percent and picking up from November. The Office for National Statistics also said Britain's unemployment rate fell to 5.7 percent, its lowest level in more than six years.

Sterling strengthened by more than 1 percent against the euro to 73.505 pence, its strongest since January 2008. Against a trade-weighted basket of currencies, sterling hit its strongest in over six years at 90.7 while against the dollar, it reached a 1-1/2-month high of $1.5456.

"Fundamentally, the UK economy is expected to continue to recover at a solid pace," wrote analysts from Danske Bank in a research note.

"The BoE is priced much too dovishly (by the market) and we see more upside potential in UK rates and look for a lower euro vs sterling in the coming three to six months as markets call for a re-pricing of (BoE) policy in a more hawkish direction."

The focus now turns to the minutes from the latest Federal Reserve policy meeting, due at 1800 GMT. In the post-meeting statement, the Fed upgraded its assessment of the U.S. economy but flagged some concerns over a decline in inflation expectations and international developments.

"We are keen to understand how deep the hawkish sentiment runs within the Fed. If not - and if a dovish tone prevails - sterling could climb to $1.55, and even $1.56 by the end of the day," said Alex Edwards, head of corporate desk at UKForex.