* Sterling falls to 2-week low vs euro
* UK Q2 GDP seen up 0.2 pct q/q, markets wary of weaker no
* But pound hits 6-week high vs under-pressure dollar
By Jessica Mortimer
LONDON, July 26 Sterling hit a two-week low
versus the euro on Tuesday ahead of data that is expected to
show a faltering UK economic recovery, but it rose to a six-week
high against a broadly weak dollar on deadlocked U.S. debt
Figures due at 0830 GMT are expected to show gross domestic
product grew just 0.2 percent in the second quarter, with
traders highlighting the risk that the data could reveal a
contraction, which would send sterling lower.
Those risks were highlighted in comments by Bank of England
policymaker Martin Weale, who said in a German newspaper it
would be naive to say there was no risk of the UK falling back
"The euro's advance against the dollar due to the U.S. debt
negotiations have propelled sterling higher with it (against the
dollar), but there are few reasons to buy the pound," said Lena
Komileva, currency strategist at Brown Brothers Harriman.
"A weak economy and a persistently wide budget deficit means
the UK's financial fragility is here to stay and may well drag
Weak growth would add to worries about the UK's debt burden
and might raise concerns about the possibility of a UK credit
rating downgrade, she added.
The euro was up 0.4 percent at 88.71 pence , off
a high of 88.83 pence.
Further gains would see the euro test the July 11 high of
88.915 pence and a break above there could pave the way for
another move towards the key 90 pence level.
Against the dollar, however, sterling was up 0.4 percent at
$1.6337 , having hit $1.6368, its strongest since
mid-June. However, traders said it faced strong resistance at
the June 15 high of $1.6383.
It was supported above its 100-day moving average at $1.6245
as the dollar came under heavy pressure, with Republicans and
Democrats deadlocked over plans to raise the debt ceiling a week
before a deadline to act.
Some analysts said the risks of a weak UK GDP reading had
been well flagged and the number might have to be below
forecasts to weigh on the pound, while a better-than-expected
number could boost it, especially versus the under-pressure
"There is risk to both sides today, but there will probably
be most market impact if data comes out weaker than the market
consensus which is slightly more bullish than our projection,"
Danske Bank analysts said in a note.
Favourable rate differentials have been a key driver for the
euro against the pound despite the euro zone sovereign debt
crisis, because the European Central Bank has already embarked
on a monetary tightening cycle.
Lacklustre growth or a contraction in the UK would add to
expectations the BoE will keep interest rates on hold until late
2012, and increase speculation policymakers may consider another
round of quantitative easing, pumping more cash into the market
to kickstart the economy.
(Editing by John Stonestreet)