LONDON: Sterling fell against the euro on Monday on softer UK data and as traders bought the single currency on speculation that, despite a sharp easing of price pressures in the euro zone, it was not enough to spur more easing by the central bank. The euro zone inflation data in March was at the its lowest level since November 2009, a shock drop that was below forecasts. The euro fell to a session low after the data, but quickly recovered ground to trade firmer on the day. The ECB meets this Thursday to decide on rates, facing the dilemma of whether to take more action to spur growth and weaken the currency which is trading near 2-1/2 year highs on a trade-weighted basis. The pound lagged the dollar after data showed British mortgage approvals slowed in February by more than expected while there was another contraction in business lending. The Bank of England said on Monday mortgage approvals numbered 70,309 in February, the lowest since October last year and below analysts' forecasts. The euro fell to a day low of 82.51 pence after the euro zone inflation data, very close to its recent three-week low of 82.47 pence struck on Friday before it bounced back to trade at 82.84 pence, up 0.2 per cent. "The ECB holds the key and after this inflation data, pressure builds on them to take action. But in the past few meetings we have seen them not take action and that has seen the euro rebound," said Nawaz Ali, market analyst at Western Union. "The chance of that happening again remains." Against the dollar, sterling edged lower to $1.6625 , although it was on track for its third straight quarter of gains. These gains have come on the back of expectations that the BoE may have to raise rates in 12 months. Investors are betting that UK purchasing managers' indexes (PMIs) due for release this week will show that Britain's recovery is on a much stronger footing and boost chances of a rate hike. But any disappointment could see sterling drop towards recent low of $1.6460, traders said. Investors were still looking to buy pounds on dips on the expectation that the UK economy will do better than the euro zone in the second quarter, putting upward pressure on gilt yields and making sterling more attractive, traders added. Despite the euro's recovery, investors remain cautious as euro zone policymakers are trying their best to tame the euro's recent strength. Bundesbank chief JensBSE -0.90 % Weidmann, who earlier last week raised expectations of ECB action, said in an interview on Saturday that about two-thirds of the fall so far in inflation was due to drops in energy and food prices which would prove temporary and should not provoke the ECB into action. "Risks are finely balanced, of course, but our base case is for no easing this week, and a maintaining of the "balanced risks" assessment for inflation," Morgan Stanley said in a note.

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