Sterling edges up against euro, UK welfare cuts expected

LONDON, July 6 (Reuters) - Sterling climbed against the euro on Monday after Greek voters overwhelmingly rejected terms of a rescue package, boosting safe-haven flows into Britain's bonds and currency.

There was no sense of panic selling in the euro, amid expectations the European Central Bank would take policy action to stabilize the market if necessary and hold emergency funding to Greek banks at the same level as last week.

But the common currency, which edged up from lows after the resignation of Greek Finance Minister Yanis Varoufakis, was still a sell on rallies, traders said.

The euro was down 0.4 percent on the day at 71.10 pence , having fallen to a low of 70.57 pence earlier in the Asian session. It was still well above last Monday's low of 69.88 pence, its lowest in nearly eight years.

"Euro/sterling has been a popular cross during the Greek crisis. There is a lot of unpredictability on how things will pan out and a lot of noise about whether there will be any debt relief or not for Greece," said Chris Turner, head of currency strategy at ING.

"In any case, euro/sterling is a sell as the ECB will keep rates anchored and we expect it to fall below 70 pence."

Against the dollar, sterling edged 0.1 percent lower to $1.5549, with traders gearing up for a budget statement later this week which is likely to lead to further fiscal tightening in Britain.

Finance minister George Osborne is widely likely to cut the welfare budget on Wednesday. Traders said any tightening could push back expectations of British interest rate hikes and weigh on the pound.

"We could see some weakness in the pound against the dollar as a knee-jerk reaction if fiscal tightening goes ahead," said a trader at an European bank.

The Bank of England meets this week and analysts at RBC Capital (Other OTC: CGHC - news) said it was difficult to see even those policymakers who have sought to raise rates choosing this meeting to vote in favour of a hike, so soon after the budget and with Greek uncertainty still high.

Last week, the Bank's chief economist, Andy Haldane, said it should steer clear of an early interest rate hike, and warned of the effect of a strong pound on economic growth. Investors see the chance of a rate hike in early 2016, according to the sterling overnight indexed swap curve. (Reporting by Anirban Nag; editing by John Stonestreet)