(Reuters) - The euro fell against the dollar on Wednesday after German data showed imports and exports falling and with investors braced for a gloomy outlook on the UK economy which was also expected to underline the impact of the euro zone debt crisis. However, the single currency's losses were likely to be limited with markets expecting the European Central Bank will ultimately step in to lower Spain and Italy's borrowing costs. The euro was down 0.25 percent at $1.2371, turning lower after recent gains that took it to a one-month high of $1.2444 on Monday. "The euro has had a couple of 'up' days and this sell-off in risk comes after weaker German and Italian numbers and we are facing what is likely to be a gloomy report from the BoE," said Gavin Friend, currency strategist at National Bank of Australia. However, the market was "certainly not underestimating the events of the last week" and that the euro was more likely to move higher. NAB sees it at $1.26 by the end of September. The currency has rebounded, in tandem with equity markets and riskier currencies, since ECB President Mario Draghi last week expressed his determination to save the euro from disintegration and warned markets not to bet against the euro. Market players have so far been unwilling to test the ECB's resolve and some banks have forecast the euro will push higher over the coming weeks. Analysts said investors were also wary before the Bank of England's quarterly inflation report at 0930 GMT, expected to include a grim outlook for the UK economy and cuts to the bank's forecasts for growth and inflation. Earlier, data showed German imports fell sharply in the three months to June while exports also dropped, adding to signs the euro zone crisis is hurting Europe's largest economy. Figures on Tuesday showed Italy shrank further into recession in the second quarter while German industry orders fell more than forecast in June. The market awaited German industrial output numbers at 1000 GMT and another weak number could weigh on the euro, analysts said. However, it was expected to stay above chart support at $1.2342, this week's low, and its 100-hour moving average around $1.2338. "For now, markets continue to be driven by expectations that a powerful ECB response is looming once the governments come to terms with asking for help," analysts at BNP Paribas wrote in a note, warning currencies remained vulnerable to "headline risk" in quiet summer markets. Sterling was down 0.2 percent at $1.5586 and was seen vulnerable if downbeat BoE forecasts increased expectations of further monetary easing in the UK over the coming months. YEN EDGES UP The yen inched higher, recovering after sagging the previous day as anticipation of ECB action boosted riskier assets and lessened demand for safe-haven currencies. The dollar slipped 0.2 percent versus the yen to 78.37 yen though it stayed within the range between 77.90 and 78.80 yen that has held for the past two weeks. But analysts said expectations of more monetary easing in the United States may push the dollar lower. On Tuesday, Boston Fed Bank President Eric Rosengren, who is known to favor a more activist approach to stimulating growth, said the Federal Reserve should launch another bond-buying program of whatever size and duration was necessary to get the economy back on its feet. Traders also said there was potential for fund repatriation by Japanese institutional investors which may also weigh on the dollar against the yen in the near term. August typically sees large bond redemptions in U.S. Treasuries as well as coupon payments, and traders say Japanese investors holding Treasuries could potentially sell the dollar against the yen to bring home some of the proceeds.

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