Sterling slips against euro, pressured by QE speculation
* Pound hovers near 7-week low of $1.5921 vs dlr
* Euro/sterling up 0.2 pct at 88 pence
* Speculation about QE builds (Releads, adds details, quotes)
By Naomi Tajitsu
LONDON, Sept 7 (Reuters) - Sterling slipped against a broadly stronger euro on Wednesday, and hovered near a seven-week trough against the dollar on speculation that recent soft UK data may eventually lead the Bank of England to resort to more monetary stimulus.
The BoE is expected to hold interest rates at a record low 0.5 percent and refrain from adding to its bond buying programme when it ends its policy meeting on Thursday.
A Reuters poll shows economists expect the UK central bank will hold rates through late 2012, while there is a 35 percent chance the BoE will resort to another bout of asset purchases to support the flagging economy.
However, London traders said some in the market were positioning for the possibility the BoE may announce more stimulus on Thursday, given persistent signs of a slowing economy in the past month.
More quantitative easing would be negative for the pound as it would flood the market with the currency, reducing demand.
Data on Wednesday showing UK industrial output unexpectedly fell 0.2 percent on the month in July highlighted the economy's shaky recovery, while a leading UK think-tank said economic growth slowed in the three months to August to just 0.2 percent.
"Sterling is being dragged by expectations of QE in the UK, especially against the euro," said Adrian Schmidt, FX strategist at Lloyds TSB.
The euro rose 0.4 percent on the day to 88.28 pence before retreating to around 88.17 pence. Its gains were capped by technical resistance around 88.15-20 pence, a range that includes its 100- and 55-day moving averages.
The common currency was supported after Germany's top court rejected a series of lawsuits aimed at blocking German aid to crisis-ridden euro zone countries.
It held gains made against the pound on Tuesday following its rally against the Swiss franc after the Swiss National Bank set a floor on the euro/Swiss franc pair at 1.2000 franc.
Sterling was flat at $1.5936 after an earlier rise to $1.6040 was met with strong offers through $1.6020, and pushed the pound towards a seven-week low of $1.5921 hit on Tuesday.
Traders said some in the market were positioning for even the slightest chance the BoE could add to its 200 billion pound asset-buying programme on Thursday.
"Some will be going into the BoE announcement short (on sterling). I think it will be a market mover," said a trader in London.
He added that the pound stood to lose 2 cents against the dollar if the BoE to expand its asset purchases by 100 billion pounds, while a 50 billion pound addition could knock it 1 cent lower.
If no stimulus is announced, sterling could rally 1 cent, he said.
Some traders said the possibility of more UK quantitative easing in the future would remain high even if the BoE sits tight on Thursday.
"QE seems to get more likely with each week and set of data that passes," said a London-based spot trader.
"Even if the BOE does not announce any fresh measures tomorrow, sterling could see a knee-jerk reaction higher, before sellers reappear and reality dawns."
Britain's proximity to the euro zone's debt crisis and a string of negative UK data have led investors to sell sterling in the past three weeks. It had scaled a 3-1/2 month high of $1.6618 against the dollar on Aug. 19, before retreating. (Additional reporting by Anirban Nag Editing by Susan Fenton)
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