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Sterling closed in on five-week highs against the euro on Thursday after robust British data heightened speculation that the Bank of England will raise interest rates further next year.
The pound tumbled against the dollar, however, as the US currency rallied against other major currencies after another US indicator pointed to a healthy economy. Weekly US jobless claims fell much more than economists had expected. This followed inflation and retail sales data earlier this week that has prompted traders to pare back their bets on US interest rate cuts early next year.
However, British November retail sales figures, which followed robust earnings growth and labour market data earlier this week, supported the pound against the euro.
Retail sales rose an above-forecast 0.3 percent on the month and 3.2 percent on the year, and the sales deflator rose for the third consecutive month, the longest run of increases since April 1999.
In addition, Britons' expectations of future inflation have risen to match their highest level since comparable records began more than six years ago, a BoE survey showed.
"Today's data and the average earnings data (on Wednesday) will strengthen the case for the hawks on the Monetary Policy Committee at the next couple of meetings," said Audrey Childe-Freeman, European economist at CIBC World Markets. "The data was mildly supportive for sterling."
The euro fell to 67.11 pence per euro by 1525 GMT, close to five-week lows of 67.09 pence set on Wednesday. Short sterling futures are now pricing in a near certainty the BoE will raise rates to 5.25 percent by the end of the first quarter from 5.00 currently. Traders are even slowly starting to increase their bets on another hike by the middle of the year. Sterling initially rose against the dollar after the retail sales data but later fell sharply after US jobless claims data to stand down a third of a percent on the day at $1.9600.

Copyright Reuters, 2006

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