Sterling surges after UK retail sales boost

By Patrick Graham and Jemima Kelly

LONDON, May 21 (Reuters) - Sterling powered to a two-month high against the euro and erased much of this week's loss against the dollar on Thursday after data showed British retail sales rose more strongly than expected in April.

The pound had taken a knock from a fall in inflation below zero for the first time since 1960 in April and the sales figures eased concerns that a slowdown in growth in the first quarter might be the start of a longer period of weakness.

By late afternoon sterling was up more than 0.8 percent on the day at $1.5665. Against the euro, itself up around a quarter of a percent against a weaker dollar, it gained half a percent to 70.97 pence per euro.

"With the recent uptick in the housing market after a winter lull, and consumer confidence at its highest for several years, there's good reason to be upbeat about the outlook for consumer spending," said Andy Scott, an analyst with corporate broker HiFX.

He said the growing conviction among investors that the U.S. Federal Reserve would hold off on raising interest rates next year might allow sterling to top $1.60. Against the euro, he said it might struggle to make more progress as the euro zone economy begins to recover in the second half of this year.

That all underlines an increasingly uncertain outlook for the major currencies after a stellar year for the dollar that has made making money for most players easy.

If the Fed is set to hold off with rises in rates, then the Bank of England is likely to do the same and policymaker Martin Weale, one of its most ardent supporters of higher rates, admitted that inflation this year would be lower than previously thought. That took some of the shine off the pound in late afternoon trade in London.

Still, retail sales volumes rose 1.2 percent on the month, the strongest increase since November, to show 4.7 percent growth on the year and exceed economists' expectations of a 3.8 percent year-on-year rise.

"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. (Editing by Ruth Pitchford)