Sterling extends losses on ECB rate outlook

LONDON, June 6 (Reuters) - Sterling slipped against the euro on Friday, extending losses a day after the European Central Bank signalled a possible interest rate rise next month, while Bank of England rates are expected to fall later in the year. The euro held broad gains made on Thursday, when ECB President Jean Claude Trichet strongly hinted that the central bank may raise rates at its next meeting to tackle inflation risks, which would shrink the difference between euro zone and UK rates and take the shine off sterling-denominated assets.

Trichet's ultra-hawkish comments came after the ECB held rates at 4 percent. The BoE also held its lending rate on Thursday, at 5 percent, but the central bank is expected to cut at least once by the end of September [BOE/INT].

Sterling had already taken a pummeling after Federal Reserve Chairman Ben Bernanke warned on Tuesday that he too was concerned about rising inflation risks, adding to the belief that the U.S. central bank's rate-cutting cycle may have ended.

"The market is shell-shocked from the movements we've had this week. Bernanke and Trichet knocked the wind out of the market," said Divyang Shah, chief strategist at Commonwealth Bank of Australia. Sterling slipped 0.1 percent to $1.9555 GBP=, staying in sight of a two-week low hit against the dollar on Thursday. The pound has fallen about 1 percent so far this week.

The euro edged up 0.2 percent to 79.81 pence EURGBP=, its highest since mid-May and putting its weekly gains against sterling around 1.3 percent.

The pound has been on the ropes after a string of poor economic data that has ignited fears about the health of the UK economy. Figures showing sales at UK retailer John Lewis fell 4.7 percent last week added to the gloom.

Investors are now awaiting U.S. payrolls data due later on Friday. Analysts said a report that is less grim than expected could further fuel the view that Fed rate cuts have ended, which would boost the dollar and push sterling lower.

Forecasts are that the U.S. economy shed 58,000 jobs in May, following a 20,000 drop in April. (Reporting by Naomi Tajitsu; Editing by Catherine Evans)