LONDON (Reuters) - Sterling edged lower against the euro on Wednesday and was seen as vulnerable before figures expected to show the UK economy contracted for a third consecutive quarter in the three months to June.
Analysts said a worse-than-expected number would hurt the pound, especially if markets started to anticipate the possibility of further monetary easing by the Bank of England or even a cut in interest rates.
Economists expect to see a quarterly fall in gross domestic product of 0.2 percent, after a 0.3 percent contraction in the first quarter, when the data is released at 0830 GMT.
"The data is widely expected to show a contraction of 0.2 percent and it would have to be something away from that to have an impact on sterling," said Paul Robson, currency strategist at RBS.
"It would have to shift market expectations so the market starts pricing in the possibility of a rate cut ... Then you would get a good chance of a squeeze in euro/sterling at these levels."
However, analysts expect the pound to stay close to its recent more than 3 1/2-year high against the euro as fears grow about whether Spain will need a full bailout and whether Greece will leave the euro.
The euro was up 0.2 percent at 77.93 pence, helped by comments from European Central Bank Governing Council member Ewald Nowotny, who said there were arguments for giving Europe's permanent rescue fund a banking licence.
But the common currency stayed close to a low of 77.56 pence hit earlier this week, its weakest since late 2008.
Against the dollar, sterling was up 0.15 percent at $1.5529, lifted by the euro's gains against the U.S. currency.
Analysts said the pound would be vulnerable if the GDP data switched the market's focus back to the weakness of the UK economy.
This could take it back towards a low of $1.5486 hit on Monday and a low of $1.5393 touched on July 12.
Recent UK data has been weak although it has had little impact on sterling because the market has been focused on events in the euro zone, with the pound benefiting from investors seeking alternatives to the euro.
Editing by Nigel Stephenson