Sterling blips higher, eyes on real wages

(Recasts with updated prices, new quotes)

By Patrick Graham

LONDON, April 15 (Reuters) - Sterling inched up on Tuesday after inflation as expected dipped to 1.6 percent, quashing some speculation in markets of a faster fall that would have undermined the case for higher interest rates next year.

The pound has been struggling for direction since February, bound on one side by predictions the Bank of England will begin to raise rates in the first half of 2015 and on the other by doubts over the durability of Britain's economic upturn.

Continuing low inflation underlines those economic concerns but is also a positive for demand in an economy in which consumer prices have consistently risen faster than household income. Monthly figures on Wednesday may show the first rise in real wages since the 2008 financial crisis.

Oliver Harvey, an analyst at Deutsche Bank (Xetra: DBK.DE - news) in London, said those wage numbers may well prove more meaningful for sterling this week than the inflation data.

Like a number of analysts with major banks, however, he was more doubtful of sterling's ability to progress further, particularly against the dollar, after 12 months which have seen it gain in value by just over 10 percent.

"I think we've already seen the top against the dollar," he said. "Against the euro the big problem is the very large current account deficit we saw in the fourth quarter of last year. I think 80 (pence per euro) is about the best we'll see."

The pound traded at 82.59 pence per euro and $1.6735 in late European trade, around 0.1 percent stronger.

British government bonds rose in tandem with German Bunds and U.S. Treasuries.

The 10-year gilt yield fell sharply in afternoon trading after reports of escalating tensions in Ukraine, having gained slightly after the inflation data. It was last down 2.4 basis points on the day at 2.614 percent.

At the heart of economists' doubts about Britain's economy are worries that growth stems only from higher housing prices and a rise in consumer credit rather than any deeper improvement in demand, wages and investment.

A retail sales survey earlier on Tuesday underlined the stiff competition on British high streets that has helped bring inflation down below the BoE (Shenzhen: 000725.SZ - news) 's 2 percent target and showed sales falling 1.7 percent like-for-like on the year last month.

The euro has struggled over the last two days against its major currency partners after European Central Bank policymakers gave their most explicit warnings that currency strength could trigger policy easing.

Ashraf Laidi, chief global strategist with London-based broker City Index Group, said a sharp 9 percent rise in the inflation numbers of UK house prices - for many the main element of growth over the past year - had helped sterling.

"Slowing inflation raises odds that real earnings growth will be positive tomorrow," he added. "Wage growth is closing the gap with inflation and business surveys have remained robust after hitting multi-month highs earlier this year." (Editing by Susan Fenton)