LONDON (Reuters) - Sterling hovered near a 3-1/2-week low against the dollar on Wednesday as UK inflation data showed a sharper slowdown than expected - though analysts said investors were focused more on the state of the labour market.
Having fallen on Tuesday after a jump in the dollar, the pound was little moved by the inflation numbers, which investors believe will have little bearing on the rising trend for inflation.
Derek Halpenny at MUFG said Wednesday's strong data from the labour market - a key determinant of future inflation - was "perhaps more important as it revealed another strong print that in our view reinforces the prospect of a rate hike cycle commencing in the second half of next year."
The pound was at $1.3760, off Tuesday's trough of $1.3726, which was the lowest since July 23.
Against the euro, the British currency steadied. It was up 0.1% at 85.105 pence but still close to two-week lows reached on Tuesday.
British inflation fell to the Bank of England's 2% target last month, a slowdown that economists said was most likely a blip as the reopening of the economy after lockdown drives prices higher.
Economists polled by Reuters had expected a 2.3% rise in consumer prices following a 2.5% rise in June.
(Reporting by Tommy Wilkes, Editing by Timothy Heritage and John Stonestreet)