Sterling slips from highs, eyes on UK industry data

* CFTC (Taiwan OTC: 1586.TWO - news) data still overwhelmingly positive on pound

* Sterling sees biggest drop against euro in two weeks

By Jemima Kelly

LONDON, July 7 (Reuters) - Sterling dipped on Monday after having hit a near-six-year high last week against a basket of currencies as some investors booked profits, with a steady flow of data in coming days set to decide whether the pound resumes its climb.

British industrial output numbers on Tuesday will be followed by the RICS housing survey on Wednesday and, crucially, trade numbers on Thursday that are expected to show the UK's trade deficit narrowed in May.

In general, the numbers on a steadily improving UK economy continue to be very positive, fuelling expectations that the Bank of England will become the second developed economy central bank to hike interest rates from their historic lows since the financial crisis. New Zealand's is for now the only central bank to do so.

But though the United States has so far shown no signs that it will move in the same direction in the coming months, some traders say that the market is beginning to question the wisdom of the Federal Reserve's dovish stance amid a flow of solid data.

If opposition to Fed policy grows, that could see the dollar beginning on a path towards a much-anticipated recovery.

"We're now entering into a phase where there's going to be more sterling strength against the euro than against the dollar," said Adam Myers, head of currency strategy at French bank Credit Agricole in London.

"We think the market is beginning to question Fed policy and if that's the case it should translate into dollar strength."

Sterling hit a session low of $1.7113 against the dollar as dealers arrived at their desks in New York after a long weekend, before recovering slightly to $1.7121, down a quarter of a percent on the day but still not far from a near-six-year high of $1.7180 hit last week.

Having hit a 22-month high against the euro earlier in the day after weak German industrial data, the pound saw its biggest daily drop in two weeks, falling by a quarter of a percent to 79.405 pence per euro. Traders said that was largely driven by corporate demand for the single currency for hedging.

There is currently a debate over the extent to which sterling can keep gaining more than a year into a rally that has taken it over 14 percent higher against a basket of currencies .

But CFTC positioning data for the week ending June 24 showed that, though short-term investors had trimmed bets on further pound gains, they were still more convinced of its potential to rise further than any of the other major world currencies tracked.

"Sterling continues to defy over-bought indications on the charts and the longer this remains the case, the less likely they are going to come to fruition," said Simon Smith, chief economist with retail FX platform FxPro.

Lee Hardman, a strategist with Bank of Tokyo-Mitsubishi in London, said he was still looking for the pound to strengthen in the near-term.

"The economy looks strong and the Bank of England is moving gradually towards raising interest rates," he said. (Additional reporting by Patrick Graham; Editing by Toby Chopra)