Sterling at 5-mth low vs euro on diverging rate outlooks

* 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 prices data also in view (Updates prices, adds quote)

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 also slipped against the dollar.

The euro EURGBP=D4 rose to 88.60 pence, its highest since late October 2010 before easing to 88.43, close to flat for the day.

Technical analysts said the next upside target was the high from that month at around 89.40 pence, while traders reported UK exporter interest to sell around 88.60/65. Analysts said diminished expectations of a Bank of England rate hike in May were likely to keep sterling under pressure after the central bank 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 priced in for May. BOEWATCH

In contrast, markets are close to pricing in a further rate hike in the ECB's main refinancing rate in June and it is more than fully priced by 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 0.2 percent weaker at $1.6355, off a 15-month high hit last week of $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 Most cited consumer price inflation figures out on Tuesday as the market's next key focal point. The data is forecast to pause its relentless surge higher in March, but will stay at a level which is more than double the BoE's 2 percent target. [ID:nLDE73A0AL]

"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 still favours an unchanged monetary policy stance for now."

Retail sales and British house price data are due for release at 2301 GMT. [ID:nLDE73A0AL]

The British Retail Consortium has warned that consumer spending will come under extreme pressure in the coming months while house prices in England and Wales are expected to continue their fall in March, but at a slower pace than in February.

"Tonight's releases on the RICS and the BRC retail survey will be worth a look especially as one point of nervousness for the MPC remains the fate of the UK consumer," Credit Agricole analysts said in a note. (Editing by Stephen Nisbet)