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Sterling hits a 3-week high on the euro

Thursday, March 27 14:49:36

Sterling struck a three-week high against the euro and extended gains against the dollar for a fourth day today after British retail sales data beat expectations and bolstered the chance of monetary tightening next year.

Retail sales volumes rose 1.7 percent in February on the month - bouncing back from a 2.0 percent fall in January - to show 3.7 percent growth on the year. Economists had expected retail sales to rise 0.5 percent on the month and 2.5 percent on the year.

The euro fell to its lowest level since March 6 at 82.68 pence after the data, from 83.10 pence beforehand. It was last trading at 82.81 pence, down 0.4 percent on the day and chartists said more losses could be in store if it closes below its 55-day moving average of 82.80 pence.

Against the dollar, sterling was up 0.4 percent at $1.6642 - the day's high - and firmer than $1.6570 before the data was released. It was last trading at $1.6630, up 0.2 percent on the day with a drop in U.S. pending home sales also weighing down on the dollar.

"UK retail sales data smashed investor expectations. Sterling/dollar has gapped higher through $1.66," said Alex Edwards, head of UKForex's corporate desk.

"The data shows consumers on the high street are feeling more confident about the UK's recovery, and it is data like this that will fuel expectations for a rate hike from the Bank of England come early 2015."

Sterling overnight interbank average rates, the very short-term interest rates which form the basis of lending costs to the wider economy, are pricing in the chance of a move in the first quarter of 2015.

The retail sales data came a day after the Bank of England's Martin Weale said a more robust economic recovery would mean a gradual increase in interest rates next year. He said signs that wage growth was picking up boded well and rates could not stay at record lows forever.

Weale's comments and the retail sales data have helped sterling recover lost ground after data earlier this week showed a steady drop in UK annual inflation, clouding the outlook for rate hikes in Britain.

Sterling's gains were more pronounced against the euro as attention is moving towards policy in Europe. Policymakers there are trying their best to tame the common currency's recent strength.

Bundesbank President and member of the ECB Governing Council Jens Weidmann said on Tuesday it was not "out of the question" for the ECB to buy bank assets to fight deflation - a softening of the German central bank's strict stance on the issue. (Reuters)