Sterling trade-weighted index holds near 7-year highs on data boost

LONDON, May 22 (Reuters) - Sterling hovered near a 7-year high against a trade-weighted basket of currencies on Friday, buoyed by recent data bolstering a view that the British economy was outperforming its peers.

Britain's public sector budget deficit narrowed more than expected in April, data on Friday showed. Public sector net borrowing, excluding state-controlled banks, totalled 6.8 billion pounds in April, down nearly 27 percent from a year earlier and the lowest shortfall for that month since 2008.

Economists taking part in a Reuters poll had forecast a shortfall of 8.1 billion pounds.

Sterling bulls emerged on Thursday after data showed British retail sales rose more strongly than anticipated in April. The currency had taken a knock earlier this week after UK inflation fell below zero in April for the first time in 55 years.

The pound was trading slightly firm against the dollar at $1.5664. It hit a two-month high against the euro at 70.905 pence per euro earlier in the session, before giving up most of those gains to trade at 71.36 pence.

Nevertheless, on a trade-weighted basket of currencies it was at 92.6, having closed at 92.7 on Thursday, its highest level since July 2008, according to Reuters charts.

"Aside from inflation risks, the UK economic outlook is extremely bright and this is very attractive to traders," said Jameel Ahmad, chief market strategist at FXTM.

"There were concerns that the UK economic revival was at risk to being over reliant on its housing sector. But consumers are now driving the UK recovery in different ways with the combination of low inflation and rising wages providing a boost to retailers."

Traders said a growing conviction among investors that the U.S. Federal Reserve could hold off on raising interest rates this year could see sterling top $1.60 in coming weeks.

Bank of England Governor Mark Carney is due to speak later in the day and traders could be reminded that the recent drop in British inflation is temporary and that interest rates are more likely to be raised than lowered.

"We like sterling, but more against euro," said Chris Turner, head of currency strategy at ING. (Reporting by Anirban Nag; Editing by Mark Heinrich)