Sterling dips after UK retail sales disappoint

LONDON, April 23 (Reuters) - Sterling backed away from a five-week high against the dollar on Thursday after data showed British retail sales fell in March, confounding expectations of a rise and wrong-footing traders who had expected a robust number.

Data showed retail sales fell 0.5 percent in March compared with February and were up 4.2 percent compared with March last year. Economists in the Reuters poll had forecast increases of 0.4 and 5.4 percent respectively.

Sterling fell to a day's low of $1.4961 after the data from $1.4990 beforehand, down 0.5 percent on the day. On Wednesday, sterling hit a five-week high of $1.5080 after Bank of England minutes showed the central bank saw a chance that inflation could rebound faster than expected.

Sterling also fell against the euro. The common currency rose 0.4 percent to trade at 71.58 pence, with corporate demand also boosting the euro, traders said.

"On the face of it, the retail sales data was disappointing and stopped sterling's advance," said Jeremy Stretch, head of currency strategy at CIBC World Markets. "But on an annual basis, retail sales are up significantly. I would still be looking to sell into euro/sterling rallies."

Sterling had gained broadly on Wednesday, hitting a five-week high against the euro earlier in the day, helped by a growing view within the nine-member monetary policy committee that the next move by the BoE (Shenzhen: 000725.SZ - news) will be a rate hike.

The minutes showed that, while the officials voted unanimously to keep rates steady at a record low 0.5 percent, for two members the decision remained "finely balanced".

Nevertheless, the uncertainty from a closely fought British election was keeping investors cautious about sterling. Investors have been increasingly buying insurance to hedge against bouts of volatility in the currency in the weeks around the May 7 poll.

Polls show the governing Conservative and opposition Labour parties neck and neck, making a 'hung parliament' likely in which no single party commands a majority. A strong showing by smaller parties such as the Scottish nationalists also makes it hard to predict what kind of government will emerge.

"Sterling continues to be traded best tactically, with investor unease with perceived election risk dampening upside momentum despite still resilient data flow," Citi analysts said in a note, adding that they were taking profit on their short euro/long sterling recommendation. (Reporting by Anirban Nag, editing by Gareth Jones)