Sterling slips after enjoying a good week on robust UK prospects

LONDON, April 11 (Reuters) - Sterling's rise against the dollar stalled on Friday after sharp gains this week, as investors paused for breath before taking fresh positions ahead of key UK data on jobs and inflation reports due next week.

The pound slipped against the euro after data showed UK construction output contracted in February, but the drop was mainly because of bad weather. Most economists still forecast the economic rebound will gather momentum, and that is likely to keep alive optimism the Bank of England will tighten monetary policy earlier than had been expected

Traders said they would wait for inflation data on Tuesday and the jobs report on Wednesday for more clues. 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.

Sterling was down 0.3 percent against the dollar at $1.6730 after reaching $1.6821 on Thursday, within striking distance of its 2014 high of $1.6823 in mid-February. Despite the drop on Friday, sterling was still on track for gains of nearly 1 percent.

Part of the rise was driven by strong UK data and a weaker dollar, which ceded ground after dovish Federal Reserve minutes. The dollar staged a small comeback on Friday, partly helped by better-than-expected rise in U.S. producer prices.

"We are seeing a bit of a fightback from the dollar, which is impacting sterling," said Simon Smith, head of research at FxPro. "Sterling, having moved higher, is likely to stay in a $1.67-$16850 range unless the data from the UK surprises."

Traders also pointed to resistance on the trade-weighted sterling index around 86.40, a level it bounced off twice in recent weeks.

The euro was up 0.25 percent at 82.95 pence, extending its recovery from a one-month low of 82.315 earlier this week.

Traders said expectations of quantitative easing by the European Central Bank will check gains in the euro, but the common currency is unlikely to fall much unless the policy measures are actually taken.

ECB President Mario Draghi, speaking in Washington, restated the bank's view that much of the fall in inflation is due to supply-driven falls in food and energy prices rather than poorer demand.

Still, banks are downgrading their forecasts for the euro, given the ECB is more likely to ease policy in the coming months if inflation stays low.

"The combination of the Bank of England (BoE) moving towards the first rate hike and the prospect of euro weakness on the back of the ECB being on an easing bias, means we expect EUR/GBP to move lower over the coming year," Danske Bank (Other OTC: DNSKF - news) said in a note.

"We now forecast euro/sterling at 81 pence in three months, down from 84 pence earlier."

In the bond market, yields on 30-year British government bonds sank to their lowest since last June after gilt prices modestly extended Thursday's hefty gains, tracking a rise in U.S. Treasury prices after J.P. Morgan (Other OTC: MGHL - news) 's earnings disappointed.

Thirty-year yields dropped as much as 2 basis points on the day to 3.415 percent, while 10-year gilt yields touched 2.594 percent, their lowest since late October. Ten-year gilts' yield spread over Bunds was steady at 110 basis points.

(Reporting by Anirban Nag and David Milliken; Editing by Larry King)