RTRS:Stg lags euro bounce, but holds near recent high
* Sterling dips against euro
* Euro helped by Merkel's comments
* Cable hovering near 2-1/2 week high vs dollar
LONDON, Aug 17 (Reuters) - Sterling slipped against the euro on Friday, moving away from recent highs with the single currency buoyed by expectations of decisive action from the ECB to lower borrowing costs for Spain and Italy.
Those expectations got a fillip after German Chancellor Angela Merkel voiced support for the ECB's crisis-fighting strategy on Thursday.
The common currency rose to 78.66 pence, moving away from 78.13 pence hit on Thursday, its lowest in more than two weeks.
The pound was steady against the dollar at $1.5720, holding near recent 2-1/2 week highs, bolstered by decent UK data of late. Traders cited offers at $1.5740-50, with stops at $1.5750 and an option barrier at $1.5800.
"Merkel's comments and expectations of ECB asset purchases are helping risk sentiment and that is one of the reasons why cable is holding near those levels," said Sara Yates, currency strategist at Barclays.
"The UK data has also been very supportive especially the retail sales numbers. I expect the currency to be in a holding pattern looking ahead to the ECB meeting next month."
Analysts say any action by the ECB early next month to lower borrowing costs for Spain and Italy will give the euro a lift against the dollar. That will also benefit sterling against the U.S. currency given the UK's strong trade and financial links with the euro zone.
On the other hand, the lack of any bold action especially at a time when worries about Greece are resurfacing could send the euro lower, both against the dollar and the British pound.
Despite sterling's second week of gains against the dollar, investors are wary of buying it in a big way given recent manufacturing and services sector data, which has suggested the UK economy remains mired in recession after contracting for three consecutive quarters up until the end of June.
This may prompt the Bank of England to ease policy later this year. Further quantitative easing is considered bad for the currency as it floods the system with more pounds. (Reporting by Anirban Nag/editing by Chris Pizzey)
