LONDON (Reuters) - Sterling recovered from a six-month low against the dollar on Friday on expectations of stronger UK retail sales data, although traders said gains may be temporary given worries about the growth outlook.
The pound has fallen heavily since the Bank of England quarterly inflation report on Wednesday forecast higher inflation and weak growth.
It pared losses on Friday, rising 0.2 percent against the dollar to $1.5527 after hitting a six-month trough of $1.5475 the previous day. The pound has fallen 4.5 percent so far this year against the dollar.
Traders said investors who had sold the pound heavily after the inflation report were being squeezed out of short positions.
UK retail sales are forecast to rise 0.4 percent in January, after falling unexpectedly the previous month.
A positive number would help soothe concerns about the UK economy slipping back into recession, although some strategists said a reading in line with consensus would not be enough to halt sterling’s recent downward trend.
“We would need a really large upward surprise compared to consensus for retail sales to have much impact on the pound. The inflation report is much more important,” said Raghav Subbarao, currency analyst at Barclays.
The euro fell 0.4 percent against sterling to 85.85 pence, moving away from a 15-month high of 87.17 pence hit on February 1.
The single currency was dragged lower by euro/yen hitting a two-week low ahead of a Group of 20 meeting in Moscow. Some investors are concerned Japan will be criticised for driving its currency lower.
Strategists at BNP Paribas said the market perception that the BoE is willing to tolerate higher inflation, which lessens consumer spending power, would continue to weigh on sterling.
They revised their euro/sterling forecast higher to 85 pence for the first quarter and 84 pence for the second quarter, although they remained bearish on the euro in the longer-term.
“However, we are still looking for a euro/sterling to fall to 78 pence by year-end driven by our expectation of far higher growth in the UK than in the euro zone,” they said in a note to clients.
Editing by Catherine Evans