Sterling drops to near 3-month vs euro on M&A outflow talk

LONDON, March 18 (Reuters) - Sterling fell towards a near three-month low against the euro on Tuesday, with the common currency bolstered by talk of inflows from a European acquisition by British telecoms group Vodafone.

Sterling also ceded ground against the dollar and was on track for its third straight day of losses against the greenback, putting in question the bullish run it has seen since the middle of last year.

More doubts have emerged about the pound this month, with many analysts saying the improvement in the UK economy and the prospect of an interest rate rise next year are well priced-in.

That is making it harder for the currency to gain more on the back of even relatively robust numbers such as annual rises of 3 percent and 5 percent respectively in construction and industrial output shown by official data last week.

Sterling has also been bolstered during this quarter by cross-border merger and acquisitions flows after Vodafone sold its stake in its U.S. arm for $130 billion. On Monday, it said it had agreed to buy Spain's largest cable operator ONO for $10 billion, a deal that is likely to lead to outflows for the pound.

The euro was up 0.1 percent at 83.85 pence, hitting its highest point against sterling since Dec. 27. The euro has also been gaining ground as more investors expect the European Central Bank to keep policy unchanged unless there is a sharp drop in price pressures.

On the other hand, investors are likely to stay clear of the pound in the run-up to this week's UK central government budget and jobs data.

"Euro/sterling continues to trade supported," said Valentin Marinov, strategist at Citi.

"It seems that part of the move may reflect investor positioning ahead of the Vodafone/ONO deal. While the overall amount of the deal is considerable, the impact on spot should be limited by hedging."

Sterling was down 0.2 percent at $1.6600, having lost ground for two straight weeks, with chartists saying that a drop below the March 14 low of $1.6568 could open it up to more losses in the near term.

Some of that weakness could come from data on Wednesday.

UK unemployment and wage numbers are likely to throw new light on the outlook for monetary policy, as will Bank of England minutes which are expected to show the bank is still in wait-and-see mode on the strength of Britain's economic upturn.

The jobs numbers are expected to show another 25,000 dip in the number of people out of work, while wages are expected to have risen 1.2 percent year-on-year - improving but still well below inflation.

"A concerted break below $1.6570 could well see further losses towards $1.6480 and even $1.6300," analysts at CMC (BSE: CMCSL.BO - news) said in a note. "We need to get back above the highs last month at $1.6820 to suggest a stronger move towards $1.7000."