LONDON Sterling traded near a 7-1/2 month low against the euro on Thursday after UK retail sales data fell short of expectations and kept alive the chances of more monetary easing in coming months.
The euro was up 0.2 percent against the pound at 81.57 pence on steady buying by German banks, and not far from a 7-1/2 month high of 81.68 pence struck on Wednesday after stronger-than-expected German business confidence helped lift the shared currency.
British retail sales were flat in November from the previous month and showed and an annual rise of just 0.9 percent, below economists' forecasts.
"Today's sales numbers could confirm a contraction in (British) GDP for the fourth quarter," said Nawaz Ali, market analyst at Western Union.
He added that uncertainty over the U.S. budget was likely to undermine the dollar in the near term and would give a boost to sterling towards the $1.63 mark.
The pound was firmer against the U.S. dollar. Traders said Asian sovereign investors were buying the pound, helping it rise against the dollar.
Sterling was last trading at $1.6280, not far from a three-month high of $1.6307 hit on Wednesday. A move above the September high of $1.6310 would take the pound to its highest since August 2011.
The British currency's latest rise against the dollar reflects a broad weakening of the U.S. currency since the Federal Reserve opted to extend its monetary easing programme earlier this month.
However, gains in the pound, especially against the dollar, could be fragile given strong expectations that the Bank of England may also have to ease monetary policy in early 2013, analysts said.
The UK economy is likely to remain stagnant in the near term, minutes from the Bank of England's Monetary Policy Committee forecast on Wednesday, with inflation probably continuing to exceed 2 percent in the next year or so.
That could lead to the Bank opting for more quantitative easing (QE) to help boost the economy.
Quantitative easing is generally negative for a currency as it increases its supply.
"The market expects there may be more QE from the Bank as we know they want a weaker pound," said Chris Turner, head of FX strategy at ING.
"(But) the big story has been the dollar generally weaker as the Federal Reserve continues to ease in the first quarter next year, and that is helping sterling."
(Editing by Andrew Heavens)