By Elizabeth Howcroft

LONDON(Reuters) -The pound slipped versus a stronger dollar on Friday but was still on track for weekly gains versus both dollar and euro, helped by data releases reinforcing market expectations for a strong economic recovery in the United Kingdom.

A preliminary reading of UK PMI data for May hit its highest level on record, with hotels, restaurants and other previously-closed customer services seeing the strongest jump in demand.

Earlier in the session, separate data showed British retail sales surged in April. Sales volumes jumped by 9.2% month-on-month – twice the average forecast in a Reuters poll of economists.

Sterling did not move substantially on the news, but strengthened throughout the morning session, reaching as high as $1.2330 before slipping later as the dollar strengthened. At 1446 GMT, it was down 0.2% on the day at $1.4165, set for a weekly gain of around 0.5% .

Versus the euro, it was up 0.3% at 85.98 pence per euro, on track for its fourth consecutive weekly gain.

ECONOMIC RECOVERY

Sterling rose above the key $1.42 level on Tuesday for the first time since February, boosted by a combination of dollar weakness and bets on a faster UK economic recovery.

Britain took a significant step towards lockdown-easing on Monday, with a ban on international travel lifted and restaurants allowed to reopen for indoor service.

Neil Jones, head of FX sales at Mizuho, said the UK economic recovery is partially priced in to the pound, but not fully because there is no clear precedent for how much vaccines will allow the economy to reopen or what the impact will be on GDP.

Jones expects cable to reach $1.45 in the summer.

Data releases earlier this week showed that British inflation more than doubled in April and UK unemployment unexpectedly fell between January and March.

For currency investors, the key question is whether rising inflation will impact the Bank of England’s monetary policy, prompting it to raise rates sooner.

“The PMIs make it pretty clear that cost pressures are rising and that firms feel comfortable with passing these onto consumers,” wrote ING economist James Smith in a note to clients.

“We’re inclined to say inflation will gradually trend lower from this time next year, reducing the immediate pressure on policymakers to consider rate hikes,” he added.

(Reporting by Elizabeth Howcroft; Editing by Catherine Evans and Andrew Cawthorne)