Sterling surges after stronger-than-expected UK retail sales

LONDON, May 21 (Reuters) - Sterling hit a two-month high versus the euro and jumped against the dollar on Thursday after data showed British retail sales rose more strongly than expected in April, recovering from a fall the previous month.

The pound had taken a knock earlier in the week on news that UK inflation had fallen below zero for the first time since 1960 in April. But the sales figures eased concerns that a slowdown in Britain's economy in the first quarter might be the start of a longer period of weakness.

Retail sales volumes rose 1.2 percent on the month, the strongest increase since November, to show 4.7 percent growth on the year, the Office for National Statistics said. That exceeded economists' expectations of a 3.8 percent year-on-year rise.

Sterling hit the day's high of $1.5657 after the numbers, up from $1.5605 before their release and leaving the pound up 0.9 percent on the day.

"The data is stronger, sterling is stronger. Boom boom," said David Bloom, global head of FX research at HSBC. "There is no other currency that is as cyclical as sterling. The numbers matter."

Sterling had pushed higher on Wednesday after minutes from the latest Bank of England meeting on monetary policy showed that two rate-setters, who did vote to keep interest rates on hold, had nevertheless made finely balanced decisions.

Minutes of the Monetary Policy Committee's May meeting showed all nine members voted to keep rates at a record low of 0.5 percent. But they were split on the risk that falling unemployment would trigger faster wage growth, which could stoke a bigger pick-up in inflation than expected.

Against a broadly stronger euro, the pound rose 0.3 percent to 71.155 pence, its strongest since the middle of March. Sterling has gained around 5 percent versus the euro in the two weeks since Britain's election, which gave the centre-right Conservative party a surprisingly clear-cut victory.

"Euro/sterling has continued to slide this week even following a weak (UK) CPI (Other OTC: CPICQ - news) release, suggesting that markets are now more inclined to rebuild euro shorts and we expect to find euro/sterling sellers on rebounds," BNP Paribas (Xetra: 887771 - news) strategists said in a research note. (Reporting by Jemima Kelly; Editing by Susan Fenton)