LONDON: Britain's pound inched down against the dollar and euro on Monday, with traders cautious ahead of key wages data due later in the week that should give them clues to the pace of monetary tightening from the Bank of England.
Markets have moved to price in an interest rate hike in May, but economists say any such tightening is dependent on pay growth picking up, and on whether Prime Minister Theresa May can soon secure a transition deal for the two years after Brexit.
The shift in market expectations followed a surprisingly hawkish BoE meeting when it said interest rates would need to rise sooner and by somewhat more than it had previously expected, in order to get inflation back on target within two years rather than three.
But anaylsts say a flat labour market report on Wednesday could dampen those expectations.
"If we were just to choose one economic data release for sterling, it's got to be the earnings numbers now," said Rabobank currency strategist Jane Foley.
"The Bank of England has hung its hat on the assumption that there will be wage inflation ... and that Brexit will be smooth. The signal they gave us that they are positioning for a May interest rate hike relies on this assumption," she added.
Foley added that investors had become more nervous about Brexit negotiations, having started the year confident that Britain would secure a transitional deal but having become less so. Sterling slumped earlier this month when the EU's chief negotiator Michel Barnier said such a deal was "not a given".
Sterling was down 0.2 percent on Monday at $1.4007, just over 2 percent down from an 18-month high hit in late January.
It was also down 0.1 percent at 88.57 pence per euro .
Positioning data released on Friday showed speculators trimmed their bets on further sterling strength against the dollar for a third straight week, though they were still net-long the currency.
"We must stress that (Brexit) negotiations are only just starting and one might bear in mind that trade negotiations are quite hard to settle," wrote Didier Borowski, head of macroeconomic research at Amundi, in a note to clients.
"Our base case scenario foresees an intermediate relationship (between Britain and the EU), with free trade in goods but only very partial passporting in financial services," they added. "There is clearly scope for the pound to depreciate in this scenario."
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