Grim economic outlook weighs on sterling vs euro

LONDON (Reuters) - Sterling failed to sustain an early push higher against a broadly weaker dollar and lost ground versus the euro on Friday as investors focused on an unhealthy combination of slowing growth and rising inflation.

The pound found initial support from data on Thursday showing smaller-than-expected falls in retail sales -- driven by purchases of computer games like Grand Theft Auto -- which kept any prospect of near-term monetary easing at bay.

But economists said the data, though stronger than expected, still painted a lacklustre picture of the UK economy, with slowing growth and increasing price pressures dominating the outlook.

"Although retail sales were not quite as bad as feared, once you have looked at the reasons behind it in terms of things like "Grand Theft Auto" and the fact that back data was revised down...you are on pretty thin ice," Rabobank markets strategist Jeremy Stretch said.

By 3:38 p.m., the pound was broadly steady at $1.9822, while the euro was up 0.2 percent at 79.56 pence, having moved above 80 pence the previous day to close in on last month's record high of 80.98 pence.

The bearish outlook was highlighted by Bank of England policymaker Andrew Sentance who said on Friday that Britain's economy looks set for a "significant slowdown" and might even tip into recession.

"Whichever way you cut it, inflation, sales, housing, confidence, if you put too many things in a line you will end up with gloom and depression -- so there's not a great deal of positivity there," Rabobank's Stretch said.

Next week, the housing market comes into focus again with May data from the Nationwide Building Society, which is expected to show prices falling further.

The Confederation of British Industry's reported sales balance for May is also expected to signal significant weakness in retail sales, analysts say.

(Reporting by Veronica Brown; Editing by Ron Askew)