Sterling at two-week low versus euro before rate decisions

LONDON: Sterling fell to its lowest in two weeks against the euro on Thursday, as soft UK data kept alive the prospects of more monetary stimulus in the coming months.

The Bank of England is expected to keep interest rates on hold and its quantitative easing programme unchanged at the end of its two day meeting on Thursday, but expectations are growing that it may have to ease policy as early as next month as the economy falters.

 The European Central Bank is also seen keeping rates unchanged on Thursday, with the single currency buoyed by expectations Spain will soon need to seek a bailout.

 The euro rose to 80.375 pence, its highest level since Sept. 20 and up 0.1 percent on the day. Near term resistance is seen at its Sept. 20 high of 80.45 pence with offers cited above 80.50 pence.

Sterling has come under pressure against the single currency as softer-than-expected economic data this week highlighted the fragility of the UK economy.

A composite of this week's data releases suggested the UK economy grew only marginally in the third quarter with construction sector activity still contracting and the dominant services sector growing at a much slower pace than anticipated.

Data on Thursday pointed to more weakness. Mortgage lender Halifax said British house prices dropped 0.4 percent in September after a bigger than initially estimated 0.5 percent fall in August, leaving prices in the third quarter of 2012 1.2 percent lower than a year earlier..

"We think there is still some bounce left in euro/sterling," said Richard Driver, currency strategist at Caxton FX. "UK data in the past week has been disappointing. That will keep sterling under pressure while any move by Spain to seek a bailout will help the euro in the short term."

The euro was higher against most major currencies, helping sterling rise against the dollar. The British pound was up 0.3 percent at $1.6115 with offers from sovereign investors cited at around $1.6140.

It recovered from a three-week low against the dollar struck on Wednesday, but is likely to struggle as the economy continues to struggle.

Britain's economy shrank by 0.7 percent in the second quarter of 2012, extending a recession that started late last year as output wilted under the pressure of government austerity and the euro zone debt crisis.