By Joice Alves

LONDON, Jan 30 (Reuters) - Sterling fell against the euro on Tuesday after encouraging mortgage and shop prices data eased some pressure on the Bank of England (BoE) to keep interest rates high as it prepares for its policy meeting this week.

Sterling fell 0.4% against the euro EURGBP=D3 to 85.57 pence and was set for its biggest one-day decline against the single currency since December. It was down 0.3% against the dollar GBP=D3 at $1.2666.

BoE data showed that British lenders last month approved the most mortgages since June, adding to signs that the squeeze on property transactions from high interest rates is easing.

The BoE said 50,459 mortgages for house purchase were approved in December, less than 52,500 forecast in a Reuters poll of economists, but up from 49,313 in November.

Separately, data published by the British Retail Consortium (BRC) showed prices in British shops rose at the slowest annual pace since May 2022 this month.

"The aggressive correction in UK BRC shop prices... should be greeted warmly by the MPC (Monetary Policy Committee)," said Jeremy Stretch, head of G10 FX Strategy at CIBC.

"However, the correction is largely a function of aggressive discounting as retailers struggle to shift stock as discretionary spending remains curtailed," Stretch added.

RBC strategists said the mortgage report was encouraging as it showed an increase in net mortgage approvals.

"Not a massive rise but the first time since June 2023 that mortgage approvals breached that 50k mark, another piece of evidence that the worst may be behind the housing market," they said.

Money markets now see a 52% chance of a BoE rate cut in May, up from 42% last Friday.

Changes in expectations of central bank interest rates are a major driver of currency markets at present, with higher rates typically supporting currencies.

POWER-SHARING

Easing some political tension in Britain, the leader of Northern Ireland's largest pro-British party expressed optimism that the regional power-sharing government could be restored within days.

Jeffrey Donaldson, leader of the Democratic Unionist Party (DUP), announced earlier that his party had endorsed proposals agreed with London on the operation of post-Brexit trade rules, and would end a near two-year boycott of the government.

Separate data showed, British grocery price inflation declined at a slower rate in January as the proportion of discounted items dropped compared to December.

(Reporting by Joice Alves
Editing by Tomasz Janowski)

((Joice.alves@thomsonreuters.com))