Sterling posts biggest weekly gain against dollar in two-months

By Lucy Raitano

LONDON (Reuters) -The pound posted its biggest weakly gain versus the dollar since May 20 this week and rose on Friday versus the dollar as the impact of weak UK economic data on the British currency was tempered by worse numbers coming out of the U.S. and Europe.

Fresh data showed Britain's businesses grew at their slowest pace in 17 months in July and inflation pressures eased, according to an industry survey on Friday that might ease pressure on the Bank of England to deliver a big interest rate hike next month.

UK retail sales volumes meanwhile fell by 0.1% from May, official data showed, although this was better than the 0.3% monthly fall expected by economists polled by Reuters.

“This afternoon we’ve had weak US data and falling US interest rates," said Mizuho senior economist Colin Asher.

"The US economy may be softening more rapidly than expected, which is why euro and sterling are both up against the dollar."

Sterling reversed earlier losses against the dollar and by 1448 GMT was 0.3% up at $1.2035, moving away from a 28-month low hit last week. And it was set to end the week 1.6% higher - its biggest weekly rise since late May

Meanwhile the pound was up 0.3% to 85.035 pence per euro at 1447 GMT, recovering from just over two-week lows touched on Thursday after a larger-than-expected rate hike from the European Central Bank boosted the euro.

Data out of the U.S. on Friday afternoon showed business activity contracting for the first time in nearly two years in July.

Euro zone business activity also unexpectedly contracted, data showed.

Despite better data readings this week, along with the its U.S. and European counterparts the Bank of England is tasked with the tricky objective of taming surging prices while avoiding a harsh economic downturn.

The BoE has raised interest rates five times since December. The next meeting is scheduled for August with market expectations for a larger 50 bps hike.

The race to replace Boris Johnson as British prime minister, which has narrowed to two candidates, Liz Truss and Rishi Sunak, also remained in focus.

(Reporting by Lucy Raitano; editing by Mark Heinrich and Alistair Bell)