Sterling firmer near 2-month highs, retail sales could help
* Sterling rises on BoE tightening expectations
* 10-yr UK gilts yields hold near 2-year high
* Euro/sterling weak near 1-1/2 month lows
LONDON, Aug 15 (Reuters) - Sterling rose to trade near a two-month high against the U.S. dollar and held near recent peaks against the euro on Thursday with investors positioning for further improvement in the UK economy.
Retail sales data for July is due at 0830 GMT and is forecast to pick up pace and rise 0.6 percent from a month earlier. That will come after a string of recent releases, ranging from rising house prices to a jump in services activity and a brighter prospect for the job market, cemented a view that the UK is on the path to a sustained recovery.
An improvement in consumer demand is likely to lift short term money market rates as investors bring forward expectations of when the Bank of England will start tightening policy. Currently under its "forward guidance" plan, the BoE expects to keep rates low until the end 2016 when it expects the jobless rate to fall to 7 percent.
Sterling was up 0.2 percent at $1.5535, not far from $1.5574 which is its highest level since mid-June. Against the euro it was trading flat on the day. The euro was at 85.50 pence, not far from a 1-1/2 month low of 85.28 pence struck on Wednesday.
"If the (UK retail sales) data print as expected or slightly better euro/sterling could well push lower beneath key support around 84.99 pence which is its 200-week moving average," said Peter Kinsella, strategist at Commerzbank.
Against a trade-weighted basket sterling was trading at 81.10, in sight of a seven-week high of 81.30.
The 10-year gilt yield was hovering near two-year highs of 2.657 percent, according to Reuters data.
The gap between two-year British gilt yields and German bunds was near its highest in a month with investors expecting the European Central Bank to keep policy accomodative for a longer period of time.
Investors are, however, increasingly pricing in a greater chance of a rate hike in 2015 by the BoE. On Wednesday, the jobs report pointed to a brighter outlook while BoE minutes showed an unexpected division among policymakers on the adoption of the guidance plan.
The steady shift in expectations has taken markets' view of the BoE rate outlook back to where it was in late June, just before Mark Carney became governor. Soon after taking over on July 1, Carney dampened expectations of an early move by calling a rise in short-term money market rates "unwarranted."
"Tighter financial conditions are the last thing the Bank wants and, as such, we believe that Carney will attempt to verbally push back market pricing over the coming weeks," Morgan Stanley said in a morning note.
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