By Stefano Rebaudo

Jan 8 (Reuters) - Sterling was set for a third consecutive decline on Thursday versus a strengthening dollar on Thursday, as retreating risk appetite stripped away support for the British currency.

The greenback edged up after mixed U.S. economic data left markets cautious ahead of Friday’s nonfarm payrolls report.

European shares extended losses on Thursday after downbeat retail earnings from some top companies, while softer gold and copper prices pressured market sentiment.

Sterling was down 0.1% at $1.3444 against the greenback, after hitting $1.3567 on Tuesday, its highest level since September 18.

Some analysts said market participants had been too gloomy about the outlook for UK growth and that sterling might perform better than expected in 2026 amid fewer concerns about the state of the economy.

However, in the near term sterling moves will be dollar-driven, as clearer indications about the UK economy will have to wait for gross domestic product data due next week and jobs data the week after.

A reduction in UK fiscal and political risks has supported the British currency since finance minister Rachel Reeves presented the budget in November.

"Taken together recent UK data confirms that consumers were perhaps less adversely impacted by the budget headlines than had previously been feared, the flip side being that scope for a further strengthening in consumption growth might be rather more limited going forward than had been thought likely," said Jeremy Batstone-Carr, an economist at Raymond James.

The euro rose 0.10% to 86.87 pence. It had dropped as low as 86.44 pence on Tuesday, its lowest since mid-September.

Domestic political developments in Britain and the chance of a closer relationship with Europe are also under the spotlight as this would provide greater access to the EU single market, potentially boosting exports and economic growth in the UK.

Prime Minister Keir Starmer said on Sunday that Britain should seek closer alignment with the European single market. 

(reporting by Stefano Rebaudo; editing by Gareth Jones)