April 21, 2017 / 10:04 AM / 4 months ago

UPDATE 3-Sterling set for best week since November, retail sales weigh

(Updates story, adds background, comments)

By Ritvik Carvalho

LONDON, April 21 (Reuters) - Sterling slipped against the dollar on Friday after weaker-than- expected UK retail sales, but it stayed on track for its strongest week since November after British Prime Minister Theresa May's decision this week to call an early general election.

May's announcement of a snap election in June saw sterling surge on Tuesday by more than 4 cents to its highest level against the dollar since October. Investors expected May to win a parliamentary majority, bolstering her position in upcoming negotiations over Britain's exit from the European Union.

The pound lost some of that sheen on Friday, after the biggest quarterly fall in retail sales in seven years. That added to signs the vote last year to quit the EU and the price rises spurred by the currency's resulting slide are finally putting pressure on consumers.

A 1.8 percent monthly fall in sales in March, below economists' expectations of a 0.2 percent dip, saw sterling edge lower versus the dollar in what dealers said was a muted reaction.

The pound was 0.3 percent lower at $1.2770 by 1546 GMT, having risen to as high as $1.2908 on Tuesday.

It was flat on the day at 83.62 pence per euro.

"The confidence the markets have got from Theresa May's decision to hold an election means that data's taken a bit of a back seat again on the back of her decision," said Jake Trask, corporate currency dealer at OFX.

Sterling's surge this week has led to some banks revising their forecasts for the currency, with Deutsche Bank - one of the biggest sterling bears - upping its forecast to $1.14 from a previous $1.06 for the end of this year.

However, the bank maintained caution was still warranted.

"Our new sterling forecast reflects our more optimistic view of the Brexit endgame, but not of sterling fundamentals," Deutsche Bank macro strategist Oliver Harvey wrote in a note, highlighting Britain's large current account deficit, slowing growth and ultra-low interest rate environment.

Retailers said on Thursday that British shoppers could face an average tariff of 22 percent on food from the European Union if Prime Minister Theresa May fails to reach a trade deal with Brussels before Britain leaves in two years' time.

That adds to a sense that risks from an expected 18 months of Brexit talks will cap any further gains for sterling.

A Reuters poll conducted after May's calling of a snap election also showed analysts see a one-in-three chance Britain will leave the European Union with no deal and have to trade under World Trade Organization terms.

Some see that as a worst-case scenario which may weaken growth for years to come, but it is the prospect of an immediate deterioration later this year which has investors beginning to wonder about bets on a rise in Bank of England interest rates.

Slightly hawkish noises from BoE policymaker Michael Saunders did not give sterling a lift.

Saunders said on Friday that he expected growth and inflation this year to be higher than the Bank forecast two months ago, and saw scope for rates to rise modestly while still boosting the economy. (Additional reporting by Helen Reid and David Milliken; Editing by Larry King)

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