LONDON: Sterling started a week set to be dominated by the Bank of England's latest inflation report with a small gain on Monday, holding just below 80 pence per euro and $1.68 after its fifth consecutive week of losses against the greenback.
The report on Wednesday, allied to employment and wage data, should provide another signal of the bank's intentions on interest rates, the key driver for the pound's 15 percent rally against the dollar in the year to the start of July.
The weakness in the past month has come chiefly on the back of a resurgence for the U.S. currency, but there are also doubts creeping back into the market over the timing of the bank's first rise in interest rates and the scale of hikes to follow.
Some analysts said wage numbers might yet prove more influential this week than the inflation report itself. Both are published on Wednesday.
"We expect the headline measure to show a drop in average earnings of 0.1 percent in the three months to June compared to last year," said Michael Turner, a strategist with RBC Capital Markets.
"This base effect led distortion will unwind next month, but even then earnings are expected to fall short of the 2.5% rate the MPC expected in May - any further surprise weakness this time will make the MPC nervous."
Sterling gained 0.1 percent against the dollar in early deals to stand up 1.6792. The euro fell 0.3 percent against the pound to 79.71 pence.
Most analysts are calling either for a rise in rates in November, when the bank publishes its next update on the outlook for inflation, or in February.
The question some outliers have begun to ask again in the last couple of weeks is whether there is enough doubt over the pace of wages, inflation and the overall solidity of Britain's economic recovery to push the timetable further out.
That has knocked sterling back almost 2.5 percent in value in the past month against the dollar and 1.3 percent against a trade-weighted basket of currencies. But that retreat for some may also have created more room for another push higher, particularly against a broadly weaker euro.
"Following recent retracement in UK interest rate expectations hawkishness could have a bigger impact on the pound," analysts from Citi said in a morning note.
"We favor short euros against sterling in the run-up to the report."
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