* Graphic: World FX rates in 2018 http://tmsnrt.rs/2egbfVh
* Graphic: Trade-weighted sterling since Brexit vote http://tmsnrt.rs/2hwV9Hv
By Jemima Kelly
LONDON, Feb 19 (Reuters) - 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
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
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."
(Editing by Richard Balmforth)
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