Sterling retreats from recent highs after BoE minutes

By Anirban Nag

LONDON, April 23 (Reuters) - Sterling fell against the dollar and the euro on Wednesday after Bank of England minutes highlighted a growing debate between policymakers about slack in the economy and the medium-term inflation outlook.

Sterling eased to $1.6795 against the dollar in afternoon trade, from around $1.6823 before the minutes were released. The currency had struck a 4 1/2-year high of $1.6842 on April 17 and some traders said the minutes were used as an excuse to book profits.

The euro rose to a day's high of 82.46 from around 82.30 pence beforehand. The common currency had fallen to a two-month low on Tuesday, but it was supported on Wednesday by better-than-expected euro zone PMI surveys.

The pound was little moved by data which showed Britain's budget deficit in the 12 months to March shrank to its lowest since the financial crisis.

Focus instead was on the BoE (Shenzhen: 000725.SZ - news) monetary policy committee's thinking on the amount of slack in the economy and the inflation outlook. A firm sterling has lowered the cost of imports, keeping a lid on inflation and giving the Bank of England more room to keep policy accommodative.

"The market will have to get used to a number of views, often conflicting, from policymakers," said Nawaz Ali, market analyst at Western Union. "But overall, the minutes are highlighting a rise in wages and a more durable recovery and is also quiet about sterling strength. So we could see sterling recover."

Sterling overnight interbank average rates - the short-term interest rates that form the basis of lending costs to the wider economy - were still pricing in the chance of a rate hike in 11 months.

Those expectations got a boost after data last week showed unemployment fell to a five-year low of 6.9 percent in the three months to February, down from 7.2 percent in the three months to January and below a Reuters poll forecast of 7.1 percent.

Wage growth also picked up to 1.7 percent in the three months to February and marked the first time since April 2010 that wage growth did not lag inflation, adding to the bullish sentiment about the UK economy. In March, consumer price inflation eased from 1.7 percent to 1.6 percent.

"A buoyant labour market remains the key supportive factor for the pound, and that is why we continue to expect notable declines in euro/sterling going forward," said Derek Halpenny, European head of global market research at Bank of Tokyo Mitsubishi (Dusseldorf: MBI.DU - news) .

The pound is also expected to remain buoyant against the euro after recent warnings from European Central Bank President Mario Draghi that further strengthening of the common currency could prompt more stimulus.

Traders said dips in the pound should be bought into, especially given expectations that UK retail sales data due on Friday could surprise on the upside. While a late Easter holiday compared to last year could weigh, large discounts by retailers should underpin demand, analysts said.

A survey of trends in British manufacturing, released by the Confederation of British Industry (CBI) on Wednesday, showed manufacturing output expectations in April were at the highest since September.

"We remain constructive on sterling because we think there could be upside risks going into the retail sales data release," Citi said in a note. "All that could suggest that any sterling dip in the aftermath of the minutes could be bought into." (Editing by Larry King and Susan Fenton)