By Harry Robertson and Amanda Cooper
LONDON (Reuters) - The pound was on track for its biggest weekly fall since February on Friday, as markets reacted decisively to signs that Britain may finally be turning a page on inflation.
Sterling was down 0.1% at $1.286 at 0912 GMT, putting it on track for a weekly fall of 1.74%.
It climbed after data showed retail sales rose more than economists anticipated in June, but then slipped back as the dollar rallied.
The rise in the greenback was triggered by a Reuters report that Japan's central bank is leaning towards keeping its ultra-loose monetary policy in place next week.
The euro was unchanged at 86.49 pence, and was heading for a weekly gain of 0.86% against the pound.
Sterling has risen sharply this year as the British economy held up better than expected, keeping inflationary pressures strong and the Bank of England on the rate-hiking path.
However, data on Wednesday showed inflation fell more than expected in June to 7.9%, down sharply from 8.7% in May.
That caused traders to reduce their bets on BoE rate hikes. According to derivatives prices, the market now thinks UK rates will peak at around 5.85%, down from expectations of around 6.5% earlier this month. The bank rate is currently 5%.
"Significant sterling upside of late has been driven by the anticipation of yet further rate hikes from the Bank of England, and (the inflation) release may challenge the need for such committed hawkish policy," said Joe Tuckey, head of FX analysis at broker Argentex.
Separate data on Friday showed rising interest rates and high inflation caused British consumer confidence to fall last month at the fastest rate since April 2022.
Dominic Bunning, head of European FX research at HSBC (LON:HSBA), said this week that the fall in sterling "has further to run".
"The inflation print is likely to make it harder for the BoE to press ahead with quite as aggressive a hiking cycle as the market has priced in, especially as broader activity data has started to disappoint over the past month."
British Prime Minister Rishi Sunak's governing Conservatives lost two strategically important parliamentary seats on Friday, but unexpectedly retained his predecessor Boris Johnson's old constituency, although the results had little effect on currency markets.
{{2126|The dodollar index - which tracks the currency against six peers - was up 0.24% to 101.01, with the greenback up 1.25% against Japan's yen.
(This story has been corrected to say sterling is on track for the biggest weekly fall since February, not March, in the headline and paragraph 1)