Sterling blips higher after in-line inflation

LONDON, April 15 (Reuters) - Sterling inched up on Tuesday after inflation as expected dipped to 1.6 percent, quashing some speculation in markets of a faster fall that would have undermined the case for higher interest rates next year.

The pound has been struggling for direction since February, bound on one side by predictions the Bank of England will begin to raise rates in the first half of 2015 and on the other by doubts over the durability of Britain's economic upturn.

A retail survey overnight had shown sales falling 1.7 percent like-for-like on the year, compared to a forecast 1 percent rise, dragging prices in the sector down by a similar amount and hurting the pound in early European trade.

That underlines the stiff competition on British high streets that has helped bring inflation down below the BoE (Shenzhen: 000725.SZ - news) 's 2 percent target and had some investors backing a lower headline inflation number ahead of the data.

"There was chatter beforehand that the number might be low, so the fact it came in in line has taken us back up a bit," said Daragh Maher, a currency strategist with HSBC in London.

The pound gained back most of its early losses to the dollar to be roughly flat on the day at 1.6722 after the data.

British government bonds reacted similarly, the June long gilt future turning negative to fall 11 ticks on the day at 110.43, having been at 110.57 before the data.

Maher said sterling may be buffetted by data on the domestic and U.S. economies this week, but was unlikely to be forced out of its recent range against the dollar.

"If U.S. numbers later today are as upbeat as yesterday's retail figures, then we may drop off against the dollar, but then we have UK labour data tomorrow which should be more positive," he said.

"That should leave us roughly steady for the week (against the dollar). If you're into the sterling story at the moment, you're probably better playing it against the euro."

The euro has struggled over the last two days against its major currency partners after European Central Bank policymakers gave their most explicit warnings that currency strength could trigger policy easing.

The pound also gained 0.1 percent against the euro to 82.51 pence. Notably, the gap between 10-year gilts and the equivalent German bund widened almost 2 basis points to 113.8 bps, its highest since last Wednesday, reflecting the pressure on Bund yields from the ECB's hints it is moving closer to more monetary easing.

Britain's FTSE 100 showed little reaction to the UK inflation data, dipping 0.2 percent to 6,571.26 by 0832 GMT.

Ashraf Laidi, chief global strategist with London-based broker City Index Group, said a sharp 9 percent rise in the inflation numbers of house prices - for many the main element of growth over the past year - had helped sterling.

"Slowing inflation raises odds that real earnings growth will be positive tomorrow," he added. "Wage growth is closing the gap with inflation and business surveys have remained robust after hitting multi-month highs earlier this year." (Editing by Susan Fenton)