LONDON: Sterling eased from three-month highs against the euro on Thursday, weighed down by subdued British retail sales data which underpinned expectations that interest rates are likely to stay lower for longer.
Data showed retail sales fell more than expected in October, after having surged a month before. Retail sales volumes fell 0.6 percent during the month after a 1.7 percent surge in September, boosted by the Rugby World Cup. The fall was bigger than the 0.5 percent drop expected by economists.
The pound fell 0.2 percent against the euro to trade at 70.15 pence per euro, having traded at 70 pence beforehand. The pound had hit a three-month high of 69.82 pence on Wednesday.
Against the dollar, sterling pared gains to trade at $1.5248 , having traded at $1.5255 before the data. The dollar fell after the Federal Reserve minutes suggested a rate hike was still on the cards for next month, driving some hedge funds to book profits on earlier favourable bets.
"The retail sales were a bit disappointing," said Alvin Tan, currency strategist at Societe Generale.
"There were expectations of a weak number, but this was a bit more subdued than that. Also the price deflator was weak. So sterling has come under some pressure post the data."
Sterling had risen on Wednesday after Bank of England Deputy Governor Ben Broadbent said at a Reuters event that investors should not put too much faith in market bets on when the bank will raise interest rates. Those bets now indicate the first increase won't come for more than a year.
Nevertheless, those tightening bets are in contrast expectations the ECB will ease policy further in coming months.
Reflecting this divergence in monetary policy outlook, the yield gap between the two-year UK gilt and its German counterpart has widened to its highest in nearly eight years, Reuters data showed.
The divergence trade has pushed the euro below the 70 pence mark and analysts said this weakening trend in the single currency is likely to stay before the ECB meeting on Dec 3.
The pound's gains against the currency of Britain's biggest trading partner kept the BoE's trade-weighted sterling basket at 94.2, its strongest since mid-August.
"Euro/sterling remains on course to test the (2015 low) of 69.35 pence," ING analysts said.
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