LONDON: Sterling slipped to a one-week low on Wednesday after data showed Britain's unemployment rate rose unexpectedly for the first time in almost two years in the three months to December.
Average earnings growth -- a key metric in the Bank of England's deliberations over when and how quickly to raise interest rates -- was unchanged over the period but jumped in December, the Office for National Statistics said.
Analysts said the unexpected tick higher in the unemployment rate -- to 4.4 percent from 4.3 percent in the previous three months -- was a mild negative, but would not be likely to shift expectations of a rate hike in May.
What would be more important, they said, would be testimony by BoE policymakers in parliament later in the day. Officials including Governor Mark Carney are to be questioned on the Bank's latest quarterly Inflation Report, which surprised markets by taking a more hawkish tone.
"All in all this was not very inspiring data," said Societe Generale currency strategist Alvin Tan.
"We don't think it really moves the needle (with respects to expectations) for a BoE hike in May ... In the near term for sterling, this afternoon's testimony is going to be a more important driver."
The pound dropped to as low as $1.3927 after the labour market report, having traded at $1.3972 beforehand. By 1025 GMT it had recovered a touch but was still down 0.4 percent on the day at $1.3942.
Against the euro, it traded down 0.2 percent on the day at 88.38 pence
Tan added that a letter from 62 Conservative lawmakers to Prime Minister Theresa May demanding a quick, clean break from the EU, was also weighing on sterling.
The group from parliamentarians within May's own party demanded a tougher approach in a number of areas, including Britain's right to move away from EU rules after leaving and the terms of any transition period, adding pressure on the prime minister to take a "hard Brexit" stance.
May will host senior ministers at her country residence Chequers on Thursday to try to broker an agreement between the factions. She is then expected to set out her plans in a speech in the next few weeks, before formal trade talks begin in March.
"The timing of the letter is ... crucial as the UK cabinet is to retreat to the countryside in order to reach Brexit decisions tomorrow," wrote IronFX strategist Peter Iosif in a note to clients. "Further uncertainty regarding Brexit and the inner political stage could undermine the pound's (direction) in the short term."
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