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Sterling slips after weak retail sales data

British pound coins are seen in this illustration

By Harry Robertson

(Reuters) - The pound fell on Friday after weak retail sales data reminded investors about the gloomy outlook for the British economy.

Sterling was down 0.26% against the dollar at $1.236. That was below a $1.244 peak touched on Thursday, which was itself not far off the highest level since October 2022.

The euro was up 0.29% versus the pound to 87.69 pence, having hit a one-month low of 87.22 pence on Thursday.

Data released Friday showed that British consumers unexpectedly cut back their spending in December.

Retail sales volumes fell 1% compared to November, in a sign that inflation and interest rate hikes are hitting consumers hard. It was a far worse performance than the 0.5% increase economists had been expecting.

"That retail sales data (is) reminding the market that things aren't as rosy as they might think," said Joe Tuckey, head of foreign exchange analysis at Argentex, a currency services company.

The pound has risen around 2% against the dollar this year, with investors hoping that falling U.S. inflation means the Federal Reserve's interest rate hikes - which sent the greenback soaring in 2022 - might soon end.

GRAPHIC: The pound has rallied against the dollar since September - https://www.reuters.com/graphics/BRITAIN-STERLING/DOLLAR/lbpggolzkpq/chart.png

Although British headline inflation has fallen from a peak of 11.1% in October, it was still running at 10.5% in December, data on Wednesday showed.

That was well above the U.S. and euro zone inflation rates of 6.5% and 9.2%, respectively, bolstering expectations that the Bank of England will keep raising pushing up rates.

Tuckey said sterling may soon bump up against economic reality, with Britain expected to fare worse than the United States and the euro zone this year.

"Cable's done quite a lot," he said, using a common term for the dollar-sterling pair. "I'm not surprised to see a retracement."

Separate data out Friday showed British consumer confidence fell for the first time in three months in January, returning to near historic lows.

The dollar index, which gauges the currency against its major peers, was up 0.17% to 102.21 on Friday. It hit an eight-month low of 101.51 on Wednesday.

(Reporting by Harry Robertson; Editing by Toby Chopra)