Sterling volatile after jobs data and Bank of England report

Sterling experienced volatile trading on Wednesday, initially buoyed by robust jobs data and then left on the defensive after the Bank of England lowered its growth forecast for the UK economy over the next three years.

Sterling dipped to $1.5658 following the publication of the BoE's latest inflation report, which has given rise to expectations that interest rates could stay at historic lows well into next year.

Before the report's release, sterling had motored to a 21-week high against the dollar, reaching $1.5747 on UK unemployment data showing the jobless rate plumbing its lowest level since the summer of 2008.

Unemployment fell to 5.5 per cent and there was a rise of 2.2 per cent in average weekly wages, the fastest rate of expansion in four years.

But the BoE said it now expected 2015 GDP to grow by 2.5 per cent, down from its previous guidance of 2.9 per cent, while it also revised downwards forecasts for 2016 and 2017.

BoE governor Mark Carney said there was a "key risk" wage growth would decline and warned that productivity growth would improve only slightly.

Ahead of his comments, the pound, already flourishing in the wake of the Conservative election victory last week and from an uplift in industrial production during March, touched its highest level against the dollar since December 17.

Sterling also gained 0.4 per cent on the euro, taking it above €1.40 for the first time in two weeks, a sign of resiliency after news of improving eurozone GDP growth, which increased 0.4 per cent during the first quarter.

James Knightley, senior global economist at ING Bank, said the UK pay boost should be good news for confidence and spending and lead to stronger sterling support.

"Given inflation is at zero and that the tax-free personal allowance has just been increased, households should be starting to sense that they have more money in their pockets," he said.

There are two key factors, however, that could weigh on sterling, say currency strategists.

The market has one eye on the new Conservative administration's plans for another round of austerity cuts, and another on the prospect of "Brexit", a British exit from the EU in a forthcoming referendum.

Jane Foley, senior currency strategist at Rabobank, said she did not expect a rate rise until May 2016. The threat of further fiscal austerity "should buy the Bank plenty of room" before rates were raised, she said.

But the market mood towards sterling remains positive, according to analysts at Commerzbank. Sterling was "still celebrating" the outright Conservative election victory, they said.

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