Upbeat retail sales sent sterling to a 20-month high against a trade-weighted basket of currencies and its strongest in more than five months versus the dollar on Friday as investors become more optimistic about the UK economic outlook.

Continuing its broad-based rise after Bank of England minutes earlier this week dampened the prospect of more monetary easing, the pound looked on track for more gains as it also stayed near a 20-month high hit against the euro on Thursday.

With concerns growing about Spain's finances, investors seeking to exit the euro have looked to UK assets as an alternative.

Some analysts said this could propel sterling towards 80 pence per euro, a level not seen since a couple of months after the collapse of Lehman Brothers in 2008. Others were wary, however, arguing the UK's high debt levels and close ties to a troubled euro zone mean the economy remains fragile.

There has been a gradual build of stronger appeal for sterling at a time when the euro zone situation is catching the headlines and is a worry, said Audrey Childe-Freeman, global head of currency strategy at JP Morgan Private Bank.

Data showed British retail sales jumped 1.8 percent on the month in March, the highest jump in more than a year and well above economists' forecasts for a rise of 0.5 percent. Warm weather and fears of a fuel shortage helped drive the sharp increase.

The pound rose as high as $1.6138 against the dollar, its strongest since October 31. This helped propel its trade-weighted index to 81.3, matching a peak reached on August 23, BoE data showed.

On course for its best weekly performance in three months, sterling looked poised to close well above its 200-week moving average against the dollar, a key chart level currently at $1.5960. Analysts and traders said this would be seen as a bullish signal which may give it further momentum, potentially towards $1.64.

The less dovish BoE minutes and positive retail sales seem to have prompted a widespread change of attitude and the possibility of a weekly close above the 200-week moving average has got sterling bulls extremely excited, said Richard Wiltshire, chief FX broker at ETX Capital.

With key resistance at $1.6100 breached, the short-term path appears to lie to the topside.

Wednesday's BoE minutes showed policymakers voted 8-1 against further stimulus. Significantly, Adam Posen, who had consistently voted for more stimulus, moved out of the dovish camp and voted for no change to the QE target.

Speaking on Thursday, Posen said although some survey data had weakened in the past month, overall it confirmed an upward trend in Britain's underlying growth, and gave him confidence the economy did not need additional stimulus.


The strong retail sales boosted hopes that data next week will show the UK avoided slipping into a technical recession in the first quarter, adding to the view that the BoE is unlikely to opt for more quantitative easing in the coming months.

The euro was at 81.86 pence, near a low of 81.62 pence hit on Thursday, its weakest since late August 2010.

The common currency's falls were limited due to reported bids around 81.70 pence ahead of an options barrier at 81.50 pence, traders said. It was also supported by a stronger-than-forecast German business sentiment survey.

More gains could be in the pipeline for sterling against the euro as the spread between the yields on UK 10-year government bonds and their German counterparts have risen by around 15 basis points this week.

However, some analysts were wary.

The UK is an island geographically but it is not an island economically and its fate will also be dependent on what happens in the rest of the world, said Nick Beecroft, senior markets consultant at Saxo Bank.

Sterling is having its day in the sun, but I think sterling/dollar could be toppish here.

(Editing by Susan Fenton)