UPDATE 1-Sterling extends gains after forecast-beating retail sales

Sterling rallied on Thursday after British retail sales data beat forecasts and on growing optimism that Britain and the European Union can make significant progress towards a Brexit deal at an EU leaders summit.

The pound was also helped by broad dollar weakness.

British retail sales jumped 3.3 percent in August compared with the same month a year earlier, better than all forecasts in a Reuters poll of economists, as shoppers maintained their strong summer spending spree.

In monthly terms, sales rose by 0.3 percent in August from July, the Office for National Statistics said, defying a median forecast for a fall of 0.2 percent.

The pound extended its gains to rise to $1.3207, up 0.4 percent on the day from around $1.3180 before the data. Sterling remains near the two-month high of $1.3215 hit on Wednesday.

Against the euro, the British currency rallied 0.2 percent after the sales data to hit 88.630 pence, close to its strongest level since early August.

"The UK continues to churn out solid economic indicators. Positive for $GBPUSD," David Madden, an analyst at CMC Markets, said on Twitter.

UK consumer prices rose at their fastest in six months in August, data released on Wednesday showed, providing further support to the pound.

But the Brexit negotiations remain the dominant driver for the pound.

Investors have pushed up the pound to its highest since July this week as they grow confident that a Brexit trade deal - helping Britain to avoid a disorderly and messy exit from the EU - can be clinched in the coming months.

Cabinet Office minister David Lidington said on Thursday Britain was more than 85 percent of the way to agreeing on a deal.

But there remains a way to go. Prime Minister Theresa May, speaking at the EU leaders summit in Salzburg in Austria on Wednesday, urged her EU counterparts to drop "unacceptable" Brexit demands that she said could rip Britain apart.

"On we go with Brexit talks as the EU summit in Salzburg tries both to be tough on the UK and get a deal onto the table," said FX strategists at Societe Generale.

"The Irish border issue remains the chief stumbling block to a deal, while the EU prepares for a November summit where it hopes an agreement will be sealed. EUR/GBP is for now clinging onto the uptrend support line is drawn from the April low."