Sterling gains against flagging euro after ECB warning

LONDON, April 14 (Reuters) - Sterling rose against the euro on Monday, rebounding from one-week lows, 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 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 would ease pressure on the BoE (Shenzhen: 000725.SZ - news) to tighten policy. A strong performance in the jobs market and a further pick-up in wages could heighten expectations for a rate hike by the Bank of England.

Sterling eased against the dollar to $1.6720 from a high of $1.6821 on Thursday, which was within striking distance of its 2014 high of $1.6823 in mid-February.

The dollar was also helped by safe-haven flows caused by 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.

Most the pound's move, though, came against the euro. The euro shed 0.35 percent to 82.69 pence, snapping its recovery from a one-month low of 82.315 last week. It fell 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."

"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 the currency strategy at ING, said that any further rise in the euro could trigger more 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. Euro/dollar gapped down in Asia and we expect to see more selling."

(Reporting by Anirban Nag; Editing by Larry King)