Sterling lifted by strong retail sales

LONDON (Reuters) - Sterling extended gains to hit a five-month high against a broadly weaker dollar on Tuesday, lifted by robust UK retail sales and positive risk sentiment stemming from better-than-expected bank earnings results.

A survey by the Confederation of British Industry showed retail sales rose at their fastest pace in three years in July, beating analysts' forecasts although helped by a reweighting of the survey.

"Following on from last week's news that GDP growth had surprised sharply on the upside in the second quarter, (there was) some more very good news on the UK economy," said Howard Archer, chief European and UK economist at IHS Global Insight.

"Nevertheless, the suspicion remains that further out consumers are likely to find life hard and will be constrained in their spending" given the government's looming fiscal squeeze, he added.

Sterling rose as far as $1.5578, its highest since mid-February, as stop-losses were triggered on the break of the 200-day moving average at $1.5555.

Sterling has traded below its 200-day since January, with technical analysts looking for a daily close above it to enhance positive sentiment.

Resistance was next seen at $1.5636, the 50 percent retracement of the move down from the August 2009 high to the May low from this year.

By 4:02 p.m. BST, sterling was back at $1.5550, up 0.5 percent on the day. The dollar was weaker across the board, at one stage sliding to 12-week lows versus a currency basket .DXY, while the euro was down around 0.5 percent against the pound at 83.49 pence.

Better-than-expected bank earnings helped risk sentiment as UBS (UBSN.VX) outdid rivals and beat profit forecasts thanks to strong investment banking revenues and shrinking client outflows, while Deutsche Bank (DBKGn.DE) held ground after a drop in loan loss provisions.

"Sterling has been going up with risk generally and today's retail sales data points to sustained growth over the summer," said Kenneth Broux, markets economist at Lloyds Banking Group.

UK shares were up 0.1 percent .FTSE in afternoon trade, paring earlier gains as U.S. consumer confidence data took the shine off equities in general.

There was also talk of dollar-selling demand due to position adjustments ahead of the month-end by funds and model funds, which could keep pressure on the greenback.

Analysts said Wednesday's appearance before the Treasury Select Committee by members of the Bank of England's Monetary Policy Committee may present downside risks for sterling.

"MPC testimonies have not been kind to sterling on the last three or four Treasury Select Committee hearings," said Broux at Lloyds.

(Additional reporting by Tamawa Desai)