Sterling climbs against flagging euro after ECB warning

LONDON, April 14 (Reuters) - Sterling rebounded against the euro on Monday after the European Central Bank stepped up its rhetoric to keep the common currency from strengthening further.

The pound underperformed the dollar, though, after gaining for most of last week. Investors were waiting for a raft of UK data on jobs and inflation due this week before taking positions.

Any drop in inflation on Tuesday would ease pressure on the Bank of England to tighten policy but a strong jobs report and a further pick-up in wages in data on Wednesday could have the opposite effect, bringing forward current expectations for a rate hike in around a year's time.

Sterling eased against the dollar to $1.6725, having hit a high of $1.6821 on Thursday, which was within striking distance of its 2014 high of $1.6823 in mid-February. The dollar gained broadly after better-than-expected U.S. retail sales numbers on Monday.

It was also helped by safe-haven flows caused by increased tension between Russia and Ukraine. Ukraine gave pro-Russian separatists a deadline of 9 a.m. (0600 GMT) to disarm or face a "full-scale anti-terrorist operation" by its armed forces. The deadline passed with no move by the separatists.

The pound's rise against the euro came after ECB President Mario Draghi said in Washington on Saturday (Shenzhen: 002291.SZ - news) that "further strengthening of the exchange rate would require further stimulus."

The euro shed 0.5 percent to 82.60 pence, snapping its recovery from a one-month low of 82.315 hit last week.

"Investors' love affair with the UK is still not over. The data remains good, while on the other hand, it looks like it is only a matter of time that the ECB will step in with more monetary easing," said Marshall Gittler, head of FX strategy at IronFX Global. "The euro will grind lower against the pound."

Traders said expectations of quantitative easing (QE) by the ECB might weigh on the euro, but the common currency is unlikely to fall much unless the policy measures are actually taken.

Still, banks are downgrading their forecasts for the euro. The ECB looks more likely to ease policy in the coming months if inflation stays low and the currency shows any sign of gaining ground, mainly on the back of capital flows into peripheral euro zone bonds and stocks.

Chris Turner, head of currency strategy at ING, said that any further rise in the euro could trigger more policy easing.

"That easing would probably be, first, a move to negative deposit rates and if the ECB were to go to QE, it would buy both public and private-sector assets with maturities of 1-10 years." He expects more selling in the euro.

British government bond yields were broadly flat in quiet trading, after falling sharply towards the end of last week in tandem with German Bunds and U.S. Treasuries after minutes from the U.S. Federal Reserve's March meeting.

The yield on the 10-year gilt was last up 1 basis point at 2.623 percent.

(Reporting by Anirban Nag and Andy Bruce; Editing by Larry King and Susan Fenton)