LONDON (REUTERS) - Sterling rose to its highest level in more than a month against the euro on Wednesday, after British data showed the jobless rate falling to a five-year low and wage growth picking up to match inflation for the first time in nearly four years.
The better-than-expected data bolstered expectations the Bank of England may have to raise interest rates in the first quarter of next year.
That is in sharp contrast to expectations of more easing by the European Central Bank, a factor which led to the widening in the rate yield gap between British gilts and German Bunds to its highest in nearly two weeks.
Sterling overnight interbank average rates - the very short-term interest rates which form the basis of lending costs to the wider economy - rose to price in a chance of a rate hike in 11 months, compared with 12 months before the data.
Sterling rose to US$1.6818, which was within striking distance of its 2014 high of $1.6823 in mid-February. It was at $1.6775 before the data was released and was last trading at $1.6804, up 0.5 per cent on the day.
The euro fell to 82.24 pence, its lowest since early March and was last trading 0.4 per cent lower on the day at 82.28 pence. Before the UK data was released, the euro was trading at 82.55 pence.
Official data showed the unemployment rate fell to a five-year low of 6.9 per cent in the three months to February, down from 7.2 per cent in the three months to January and below a forecast in a Reuters poll of 7.1 per cent.
The Office for National Statistics said total pay growth picked up to 1.7 per cent in the three months to February when consumer prices also rose 1.7 per cent. It was the first time since April 2010 that the pay growth rate did not lag the consumer price index, the ONS said.
"Sterling has gapped higher across the board after the data," said Alex Edwards, head of the corporate desk at UKForex. "Markets are now aggressively pricing in an early BoE rate hike. We are now looking at January or February 2015 for a hike. This data is likely to continue lending support and a push towards $1.70 is now on the cards."
The pound is expected to remain buoyant against the euro after European Central Bank President Mario Draghi warned at the weekend that any further strengthening of currency would require further stimulus.
Data on Wednesday confirmed a shock drop in March euro zone inflation to its lowest level since November 2009, keeping pressure on the ECB to intervene should prices not rebound.
"Following dovish ECB comments this week we expect euro/sterling to remain under pressure and we expect the cross to eventually challenge last week's lows of around 82.30 pence,"BNP Paribas said in a note.