Pound surges to highest level since European Union referendum

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Earnings were up 2.8 per cent, the Office for National Statistics said, while inflation drifted back to 2.7 per cent.

"I don't think this will change expectations about the May rate hike, but the way the pound fell after the data was released shows that the market is long on sterling, hedge funds in particular", said Jordan Rochester, an FX strategist at Nomura.

The UK unemployment rate fell by 10 basis points to a fresh 42 year low of 4.2% when markets had anticipated that it would hold steady at 4.3%.

The pound has also been at its highest level for almost a year against the euro in recent days, at just under €1.16.

Inflation had topped 3% in recent months but more recently has eased, meaning that according to the latest figures wages, stripping out bonuses, are now growing in real terms by 0.2% - the first positive reading since the three months to January 2017.

Sterling weakened as the data showed wages in the three months to February rose by 2.8 percent, unchanged from the growth rate in the three months to January and below a median forecast of 3.0 percent in a Reuters poll of economists.

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Unemployment in the United Kingdom unexpectedly fell between December and February, according to new data released by the Office for National Statistics on Tuesday. An ONS spokesman said bonus payments in February were lower than a year earlier but it was too soon to draw conclusions about the bonus season as a whole.

That's above the 2.7 percent inflation recorded during the month and suggests that the immediate squeeze on household incomes, largely stoked by Britain's vote in June 2016 to leave the European Union, has come to an end.

Rate setters predicted at the time that inflation would remain above the 2% target until at least the first quarter of 2021 and that it would average around 2.9% for the first quarter of 2018.

It is not yet clear whether the steeper than expected fall in consumer prices will be enough to encourag the BoE to "wait and see" for a few more months before raising rates again, or if it will be minded to go ahead out of concern over the faster pace of wage growth.

Tuesday's wage data adds fuel to the argument that the Bank of England will likely increase interest rates at the next meeting of its Monetary Policy Committee in the first week of May.

By 11:10 a.m. BST (6:10 a.m. ET), sterling was marginally lower against the dollar at $1.4313.

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