Sterling strengthens on Burnham win, retail sales data

LONDON, June 19 (Reuters) - The pound rose on Friday as traders digested a parliamentary by-election victory for Andy Burnham which clears a hurdle for him to potentially oust British Prime Minister Keir Starmer, as well as a batch of British economic data.

Sterling was last up 0.25% on the dollar at $1.3238, bouncing off a near-three month low hit in Asia trade. Sterling also firmed against the euro, with the common currency down 0.2% at 86.61 pence, moving off an overnight one-month high.

"We're seeing a tactical bounce, a Burnham victory has removed some of the uncertainty -- if he hadn't won it's hard to say what would have happened -- and retail sales data is also helping," said Nick Rees, head of FX strategy at Monex Europe.

Burnham won a decisive victory for Britain's ruling Labour Party in an election for a parliamentary seat in northwest England. He has signalled that he will use his victory to enter any contest to replace Starmer, though the Prime Minister has vowed to fight any challenge.

Friday's data showed retail sales volumes rose 1.2% in May, well above economists' forecasts for a 0.5% increase, though investors also had to process separate data showing British government borrowing jumped more sharply than expected.

But away from Friday's news, the pound has been struggling, against both the euro and the dollar. It has fallen 1.2% on the greenback this week.

The Bank of England left interest rates steady on Thursday and while two of its nine rate-setters voted to tighten policy, most others appeared some way from voting for a hike.

Softer than expected inflation data has also led markets to reduce bets on the amount of BoE rate hikes they expect this year. They are only pricing one 25 basis point rate increase by year-end.

In contrast the European Central Bank raised interest rates last week, and the Federal Reserve on Wednesday held rates steady but policymakers' new quarterly projections showed nine of 19 of them now anticipate a rate hike this year.

Rees said he expected the pound to weaken in the coming months as Burnham's win has removed the immediate uncertainty, but, "It still doesn't answer the question of what he would do in power."

"Married to that, some of the data out of the UK has been weak though the market is still pricing in rate hikes. We think that's wild and they won't hike rates."

(Reporting by Alun John;Editing by Elaine Hardcastle)