LONDON - The British pound rose 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.
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 117 basis points of tightening by the end of the year.
"Although consumer purchasing power is set to be eroded further by an apocalyptic rise in food prices, that is not likely to deter the Bank of England from the necessity of having to be tougher with its monetary policy given that wage growth is fast becoming another inflationary pressure," said Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown.
Expectations of rising interest rates usually boost the value of a currency.
At 0830 GMT, sterling was up 1.3% against the U.S. dollar at $1.2479, its highest level since the Bank of England's last policy announcement, on May 5.
Against the euro, the pound was up 0.7% at 84.08 pence.
Sterling traders are also keeping an eye on the latest developments relating to Northern Ireland.
Britain is to set out steps to tackle post-Brexit trade issues in Northern Ireland on Tuesday, but will not introduce a new law this week, Northern Ireland minister Brandon Lewis said.
The EU has 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.
"Northern Ireland is a big risk and it isn't priced in," said Naeem Aslam, chief market analyst at Ava Trade.
"We strongly believe that risk is skewed to the downside for sterling."
(Reporting by Samuel Indyk; Editing by Bradley Perrett)