July 26, 2011 / 8:06 AM / 8 years ago

Sterling falls vs euro before GDP data; up vs weak dlr

* 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 (Reuters) - 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 talks.

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 into recession.

“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 sterling weaker.”

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 dollar.

“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)

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