Pound surges after strong labour market data

By Samuel Indyk

LONDON (Reuters) -The British pound jumped to its highest level since May 5 on Tuesday as strong labour market data reinforced expectations that the Bank of England (BoE) will need to continue raising interest rates to fight high inflation.

Britain's unemployment rate fell to its lowest since 1974 in the first three months of this year, while total pay was up 7.0% on a year earlier, far exceeding economists' average forecast of a 5.4% rise as companies resorted to bonuses to attract or keep staff.

"Today's release of stronger-than-expected UK wages data helped to offset some concerns that real incomes are falling too far behind prices," said Fawad Razaqzada, market analyst at City Index.

"In addition, the dollar eased back across the board and this helped to further fuel a rally in the GBP/USD exchange rate."

The BoE is closely watching the labour market, as it fears that higher-than-normal pay growth could see the current energy-driven surge in inflation become entrenched.

Money markets are currently fully pricing in another 25-basis-point interest rate rise at the BoE's June meeting and a total of 122 basis points of tightening by the end of the year.

Expectations of rising interest rates usually boost the value of a currency.

At 1522 GMT, sterling was up 1.1% against the U.S. dollar at $1.2459, after earlier hitting its highest level since the Bank of England's last policy announcement, on May 5, at $1.2498.

Against the euro, the pound was up 0.2% at 84.50 pence.

Sterling traders were also keeping an eye on the latest developments relating to Northern Ireland.

British foreign secretary Liz Truss said on Tuesday she intends to introduce legislation in the coming weeks to make changes to the Northern Ireland protocol, which was part of the Brexit divorce deal.

The EU has previously warned of legal action and a trade war if London takes any unilateral action over the Northern Ireland protocol governing post-Brexit trade with the province.

(Reporting by Samuel Indyk; Editing by Bradley Perrett and Ken Ferris)