LONDON, Oct 20 (Reuters) - Sterling inched higher against the euro and the dollar on Monday, with its near-term direction set to rest on a round of UK data releases and whether this week sees a revival of a broader dollar rally.
Gross domestic product numbers on Friday should prop up a currency plagued by increasing doubts in the solidity of Britain's economic recovery in the face of a worsening outlook in Europe.
Before then retail sales numbers, judging by other already released surveys, may support the softer outlook on growth which has led investors to push back expectations for a first rise in interest rates into the second half of next year.
Sterling had its biggest loss in eight months against the euro last week on the back of that repricing of expectations on rates. <0#FSS:>
"There may be some support from the GDP numbers on Friday," said Jane Foley, a strategist with Rabobank in London.
"But the message from the Bank of England's chief economist on Friday was pretty gloomy: it's going to be very difficult for the UK to raise and the market is I think in that frame of mind. That may put sterling on the defensive against the dollar."
In early deals in London on Monday, the pound gained just over 0.1 percent against both the euro and the dollar at respectively 79.18 pence per euro and $1.6115 .
Bank of England chief economist Andrew Haldane said financial markets may be right to bet that the first interest rate hike since 2007 would come in the middle of next year. He also said he was in favour of keeping rates low for longer, given the uncertainties surrounding UK and global economic growth.
Minutes from the BoE's Oct. 9 meeting, due out on Wednesday, will be watched for more of that dovish tone. Talk among analysts that another member of the nine-strong Monetary Policy Committee might have swung to vote for higher rates has largely evaporated. Two members had backed a rate rise at the previous meeting in September.
"The market may well be quite immune to the minutes," Foley said. "The dollar may be the biggest factor this week. A huge number of positions has been cleared out and the dollar is probably going to be in better form this week than last."
The more uncertain monetary policy outlook has helped the pound shed almost 7 percent against the dollar over the last three months. Investors are also becoming increasingly wary about political risks in Britain, which they say could have a bearing on investment flows and sterling.
The latest polling showed growing support for anti-EU party UKIP, whose leader, Nigel Farage, said he would demand an immediate referendum on European Union membership as his price for supporting any coalition government after a parliamentary election due in May.
"Sterling remains vulnerable," said Kit Juckes, a strategist with Societe Generale in London.
"With growth having peaked, with fiscal policy set to be tighter after next May's election regardless of who wins, and with no sign (yet) of any upward pressure on inflation from wages, it still seems likely that the later the rate cycle starts, the lower the peak will be." (Editing by Susan Fenton)