Sterling hits 3-week high vs euro after UK retail sales data

By Anirban Nag

LONDON, March 27 (Reuters) - Sterling rose to a three-week high against the euro and extended gains against the dollar for a fourth day on Thursday, after British retail sales data for February beat expectations and bolstered chances of monetary tightening next year.

Data showed sales volumes rose 1.7 percent on the month - bouncing back from a 2.0 percent fall in January - to show 3.7 percent growth on the year. Economists had expected retail sales to rise 0.5 percent on the month and 2.5 percent higher on the year.

The euro fell to 82.685 pence after the data from 83.10 pence beforehand, to its lowest level since March 6.

Against the dollar, sterling was up 0.4 percent at $1.6642 - the day's high - and firmer than $1.6570 before the data was released. It was last trading at $1.6620, up 0.2 percent on the day.

"UK retail sales data smashed investor expectations. Sterling/dollar has gapped higher through $1.66," said Alex Edwards, Head (Other OTC: HEDYY - news) of Corporate Desk at UKForex.

"The data shows consumers on the high street are feeling more confident about the UK's recovery, and it is data like this that will fuel expectations for a rate hike from the Bank of England come early 2015."

The market, as reflected in the sterling overnight interbank average rates, the very short-term interest rates which form the basis of lending costs to the wider economy, is pricing in the chance of a move in the first quarter of 2015.

The retail sales data came a day after Bank of England's Martin Weale said a more robust economic recovery would mean a gradual increase in interest rates next year. He added signs that wage growth was picking up boded well and rates could not stay at record lows forever.

Weale's comments and the retail sales data have helped sterling recover lost ground after data earlier this week showed a steady drop in UK annual inflation, clouding the outlook for rate hikes in Britain.

Sterling's gains were more pronounced against the euro as attention is moving towards policy in Europe. Policymakers there are trying their best to tame the common currency's recent strength.

Bundesbank President and member of the ECB Governing Council Jens Weidmann said on Tuesday it was not "out of the question" for the ECB to buy bank assets to fight deflation - a softening of the German central bank's strict stance on the issue.

Any further easing of ECB policy would be expected to weaken the euro against its major peers.

"For euro/sterling, a break of 83 pence would allow a move toward 82.50/60 pence," said Tom Levinson, currency strategist at ING.

(Editing by Larry King)