By Jemima Kelly
LONDON (Reuters) - Sterling fell against the dollar and euro on Thursday after data showed British retail sales rose by less than expected in July, easing pressure on the Bank of England to raise interest rates.
Investors reckon the BoE will start hiking rates from their historic lows in early 2016 as the UK economy continues to pick up speed - an expectation that carried the pound to a 7-1/2-year high on a trade-weighted basis earlier in the week <=GBP>.
But although the central bank has indicated the next rate hike is getting closer, the latest data suggests there should be no hurry.
Inflation edged up by just 0.1 percent in July, numbers showed on Tuesday, while Thursday's data showed retail sales volumes also grew just 0.1 percent on the month, lagging forecasts of a 0.4 percent increase.
Sterling fell half a percent to $1.5607 after the retail sales data, from $1.5662 before its release. Against the euro, it fell 0.7 percent to 71.42 pence, its weakest in six days .
"The numbers were disappointing, but I don't think it changes the picture that much," said BNY Mellon currency strategist Neil Mellor. "It aligns with my view that the case for a turn in interest rates ... isn't as straightforward as we think."
"You've got to like (sterling) against the euro but I would think that its future against the dollar is going to be capped at these sort of rates."
Investors are expecting the U.S. Federal Reserve to move before the BoE, but minutes from the Fed's latest meeting, released late on Wednesday, showed policymakers worrying that lagging inflation and a weak global economy posed risks too big to commit to "lift-off."
"We expect market pricing to discount the fact that domestic (UK) activity is not the true concern for the (BoE) at present; the greatest stumbling block is found in the headline inflation figure, which remains marginally above zero," wrote strategists from ING in a research note.
"So long as this remains depressed by the transitory effects of prior sterling strength and low energy costs, we think it will be difficult for the (BoE) to credibly convince the broader public that the UK economy is ready to withstand higher interest rates."
(Reporting by Jemima Kelly; Additional reporting by Andy Bruce; Editing by Ruth Pitchford)
