Sterling inches up, supported by UK retail hopes, Draghi drags euro

By Jamie McGeever

LONDON, April 24 (Reuters) - Sterling inched higher against the dollar and euro on Thursday, supported by a surprisingly strong measure of UK retail sector activity that bodes well for March retail sales data due on Friday.

The pound traded in relatively narrow ranges, however, kept in check by the euro, which came under pressure after European Central Bank President Mario Draghi said the central bank could take action to tackle the high exchange rate and low inflation.

The Confederation of British Industry's monthly Distributive Trades report showed a big rebound in retail sales growth in April. Expectations for the following month were the highest in almost three and a half years.

The Office for National Statistics releases closely watched retail sales data for March on Friday. Economists see a monthly decline of 0.4 percent but an annual increase of 3.8 percent.

Simon Smith, head of research at FxPro in London, said only a really strong report would take sterling beyond last week's 4 1/2-year high of $1.6842.

"Punchy retail sales could get it up there, but sterling has done well recently and the push towards these highs will be met by sellers," he said.

Less than a year ago, sterling was trading under $1.50. Now it is close to $1.70.

At 1500 GMT sterling was up 0.1 percent on the day at $1.6801 and the euro was down 0.1 percent at 82.22 pence , the 14-day moving average at 82.44 pence proving to be solid technical resistance.

The debate on when the Bank of England will raise rates continues to dominate sterling trading. With unemployment falling faster than the Bank had expected and Britain among the fastest growing developed economies in the world, the betting is it could be early next year.

"We expect the BoE (Shenzhen: 000725.SZ - news) to hike rates earlier than consensus, in 4Q 2014, therefore exerting upward pressure on UK rates," said Unicredit (Berlin: CRIH.BE - news) analysts in a research note on Thursday.

In the fixed income market, British government bond prices tracked euro zone debt lower on Thursday, reversing most of Wednesday's gains as 10-year yields rose back above 2.70 percent.

Gilt yields were around 2 basis points higher across most of the curve, and 30-year gilt yields briefly touched a two-week high of 3.495 percent - 3 basis points up on the day - shortly after the release of strong U.S. durable goods data.

There was solid demand at a sale of 4 billion pounds ($6.71 billion) of benchmark five-year gilts, which sold at an average yield of 1.951 percent and a bid-to-cover ratio of 1.77. The spread between 10-year gilts and German Bunds widened marginally on the day to 116 basis points.

($1 = 0.5960 British Pounds) (Reporting by Jamie McGeever and David Milliken; Editing by Catherine Evans)