By Linda Pasquini

(Reuters) -Sterling gained slightly against the dollar on Friday but was set for a loss on the week as uncertainty over the Israel-Iran conflict fuelled demand for traditional safe havens such as the greenback.

Weak UK retail data earlier in the session and the Bank of England's decision on Thursday to keep rates unchanged had little effect on the pound.

Sterling was 0.2% higher at $1.3495 but eased 0.6% against the dollar on the week, after two consecutive weeks of gains.

The dollar was set for its biggest weekly rise in more than a month on Friday.

The BoE said it was monitoring risks from a weaker labour market and higher energy prices on the back of the conflict as it held interest rates at 4.25% as expected on Thursday, sending the pound down briefly against the U.S. dollar.

"The pound was only lightly touched by a consensus Bank of England hold yesterday," ING FX Strategist Francesco Pesole wrote in a note to clients.

"Yesterday's 6-3 vote split for a cut can be interpreted marginally on the dovish side and is allowing markets to reinforce their conviction call on an August cut."

Markets now priced in a near-60% chance for a quarter-point cut at the BoE's next policy meeting.

The euro was marginally up to 85.43 pence on Friday, set for its second week of gains in a row.

Sterling briefly pared some earlier gains against the U.S. dollar after weak British retail sales data, which saw volumes recording their sharpest drop since December 2023 last month, as demand fell after shoppers splurged on food, summer clothes and home improvements the month before.

"Retail sales in May brought significant payback" after a "hard to explain" strength in the previous four months, Allan Monks, chief U.K. economist at J.P. Morgan, said.

The figures came alongside government borrowing figures which showed a slightly larger than expected budget deficit of 17.7 billion pounds ($23.88 billion) for May.

Britain's economy grew at a faster-than-expected pace in the first quarter of 2025 but shrank in April, as a property tax break ended and U.S. tariffs started to sting.

The BoE forecasts overall growth of 1% for 2025.

($1 = 0.7413 pounds)

(Reporting by Linda Pasquini; Editing by Amanda Cooper and Andrew Heavens)