LONDON - Sterling retreated on Wednesday, after surging on the back of stronger-than expected British business activity, as traders awaited consumer confidence data and focused on Britain's political headaches.

After strengthening 0.6% against the dollar on Tuesday, sterling was down 0.24% to $1.2083 at 1151 GMT. Against the euro, it was steady at 87.93, having climbed 1% on Tuesday.

Data showed on Tuesday an unexpected bounce in Britain's preliminary "flash" S&P Global/CIPS UK Composite Purchasing Managers' Index, boosting speculation the country might avoid a long recession and bets the Bank of England (BoE) might keep rates higher for longer.

The PMI data came in the wake of stronger-than-expected retail sales, but looking ahead markets will be focusing on the Northern Ireland post Brexit trade agreement impasse, and on GFK consumer confidence data due later this week, said Jeremy Stretch, head of G10 FX strategy at CIBC.

"The realisation that the latter remains near lows, underlining a degree of consumer reticence is likely to combine with ongoing UK political headaches relating to the Northern Ireland protocol," Stretch said, pointing to a likely correction back towards $1.2005/15.

Britain and the European Union are edging closer to resolving their dispute over the so-called Northern Ireland protocol, which sets out the conditions for post-Brexit trade with the province to avoid creating a hard border with EU member Ireland and to help protect the bloc's single market. But political discussions are ongoing.

Keeping sterling afloat against a strengthening dollar, money markets are now pricing a 99% chance of the BoE raising rates by a further quarter of a percentage point on March 23.

UK rates are seen as most likely to peak at 4.75% later this year, in contrast to many economists' previous expectations that March's rate rise would be the last in the BoE's current tightening cycle.

(Reporting by Joice Alves)