Jury out on sterling ahead of inflation data

By Jemima Kelly and Patrick Graham

LONDON, July 14 (Reuters) - Sterling and British government bond prices edged lower on Monday, before two days of economic data that should provide more clarity on whether Britain's recovery is on track and liable to provoke a rise in interest rates soon.

The pound suffered its first weekly decline versus the dollar in six weeks last week, after a string of poorer-than-expected numbers cast doubt on whether the Bank of England will raise interest rates before the end of the year.

Sterling has risen more than 10 percent against a basket of currencies over the past year and came close to a six-year high earlier this month. The gains were largely driven by expectations the BoE will raise rates from historic lows earlier than its peers in North America and Europe.

But if UK inflation and employment data due out on Tuesday and Wednesday respectively disappoint the market, sterling could come under pressure.

"Right now the pound is just pausing for breath, holding onto its gains," said Kathleen Brooks, research director at Forex.com. "The risk is for a sell-off on Tuesday and the opposite, potentially, on Wednesday, if we get stronger-than-expected wage growth."

Others were more firmly positive. The pound has made several attacks on resistance levels close to a six-year high just below $1.72, and the British economy remains one of the few in Europe that appears on a sounder footing.

If that adds up to rises in interest rates just as the European Central Bank may be taking more action to depress euro zone equivalents, it's likely to strengthen the pound against the single currency.

"Does a slight tick-up in inflation warrant a bit of a bid for the pound?" said Kit Juckes, a strategist with SG in London.

"A week of consolidation has taken EUR/GBP relative strength indices back into neutral territory and CFTC (Taiwan OTC: 1586.TWO - news) data show GBP longs were cut back in the week to July 8, so maybe there is a bit more to go."

Tuesday's consumer price data for June are forecast to show a rise to 1.6 percent from May's 4 1/2-year low of 1.5 percent.

Sterling was down 0.15 percent against the dollar at $1.7078 . Against the euro, it dipped 0.2 percent to 79.76 pence per euro.

Ten-year gilt yields rose 1 basis point to 2.61 percent. September gilt futures held within a 23-tick trading range - the narrowest for 10 days - in thin volumes.

Ten-year gilts' yield spread over Bunds was unchanged on the day at 140 basis points, though earlier in the session it touched a two-week low of 138.6 basis points. (Editing by Larry King)