Sterling at 5-mth low vs euro, key inflation data ahead

* Sterling hits 5-1/2-month low versus euro, falls vs dlr

* Pressured by falling expectations of a May rate hike

* Inflation data Tuesday may give sterling temporary boost

* Retail sales, house price data also in focus

By Brenda Goh

LONDON, April 11 (Reuters) - Sterling hit a five-and-a-half month low against the euro on Monday as investors bet that UK interest rates would continue to lag those in the euro zone, while the pound was steady against the dollar.

The euro EURGBP=D4 rose to 88.60 pence in early morning trade, its highest since late October 2010, before easing to 88.15 pence, down 0.2 percent on the day.

Technical analysts said the euro's next upside target was the October high around 89.40 pence, while traders said the rally had been capped by UK exporters selling the euro around 88.60/65, helping to keep euro/sterling in its long-term range.

"Instead of having the very slow series of descending highs that we've seen since the record peak in 2009, we're moving into a broad sideways phase," said Nicole Elliott, currency strategist at Mizuho Corporate Bank.

"At the moment I'm hoping that the most recent (euro/sterling) rally yet that we've seen since late February will be capped at 89.45 pence."

Diminished expectations of a Bank of England rate hike in May were likely to keep sterling under pressure after the BoE left rates on hold at 0.5 percent last Thursday.

"The underlying story is that people are losing confidence in the May rate hike in the UK, and have pretty much moved their expectations out to August now. The (inflation) data is going to be the key issue," said Adrian Schmidt, currency strategist at Lloyds TSB.

Investors are now fully pricing in a 25 basis point hike in August with only a slight chance of a rise being priced in for May. BOEWATCH

In contrast, markets are close to pricing in a further rise in the ECB's main refinancing rate in June and have more than fully priced in a rise in July ECBWATCH. The ECB raised rates on Thursday by 25 basis points to 1.25 percent and signalled there may be more tightening to come.

Against the dollar GBP=D4, the pound was flat at $1.6385, off its 15-month high hit last week at $1.6430 following a faster-than-expected surge in UK producer prices.

Traders said it would need to break above the January 2010 high in the $1.6460 area to gather fresh upside momentum.

UK INFLATION DATA

Analysts said UK consumer price inflation data due out on Tuesday was the market's next key focal point. March inflation is forecast to be steady at 4.4 percent, pausing after a recent run-up but still more than double the BoE's 2 percent target. [ID:nLDE73A0AL]

However, there is the risk that the number may be higher-than-expected in view of last week's surprisingly strong factory gate inflation data.

"If we see another upside surprise from the inflation data this could provide support for sterling in the immediate aftermath of the release," said Valentin Marinov, currency strategist at CitiFX.

"The recent experience has been, however, that investors tend to sell into those rallies, the idea being that despite inflation being so high and indeed, so well above the BoE's target, the balance of risk as seen by the MPC (BoE's Monetary Policy Committee) still favours an unchanged monetary policy stance for now."

Sales data from the British Retail Consortium and house price figures from the Royal Institute of Chartered Surveyors are due for release at 2301 GMT. [ID:nLDE73A0AL] (Additional reporting by Neal Armstrong; Editing by Susan Fenton)