FOREX-Euro gains broadly as ECB looms, sterling slides

(Changes byline, updates prices, adds quotes)

By Jamie McGeever

LONDON, April 8 (Reuters) - The euro strengthened on Tuesday to a three-month high against the yen and a record peak versus sterling on the view the European Central Bank will indicate later this week no interest rate cuts are on the immediate horizon.

Economists and financial markets fully expect the ECB to keep rates steady at 4 percent on Thursday, and not start easing for a few months as it grapples with high and rising inflation.

There were no fresh economic or market developments on Tuesday to radically boost this view but the quiet start to the week has allowed traders to focus on the contrast between the ECB's hawkish stance and other central banks' policies.

The U.S. Federal Reserve is seen cutting by at least 25 basis points this month from 2.25 percent, Japan's rates are set to remain at an ultra-low 0.5 percent this week and surprisingly weak British house price data on Tuesday intensified speculation the Bank of England will cut rates on Thursday.

"I don't think expectations have changed a great deal -- the ECB will stay on hold and likely maintain their hawkish rhetoric," said David Pais, currency strategist at Citigroup.

He added that some corporate-related buying in a thin market -- "lumpy flows you get from time to time" -- as well as euro/sterling's jump after the Halifax British house price data put a gloss on the euro's performance.

The euro hit a three-month high of 161.74 yen EURJPY= according to Reuters data, before slipping to 161 yen at 1100 GMT, still up on the day.

The euro also jumped more than one cent from the day's lows to a one week high of $1.5798 EUR= before paring gains to trade at $1.5763, up 0.4 percent on the day.

The euro's failure to break options barriers at $1.5800 prompted the retreat from session highs, traders said. Some noted talk of an options structure at $1.56-$1.58 held by a large Asian account that could keep the spot rate within that range for a while.

STERLING SLIDES

Sterling was the biggest loser amongst the majors, falling 0.8 percent to $1.9720 GBP= and 1 percent against the euro to a fresh record low of 79.835 pence per euro EURGBP=.

Halifax, Britain's biggest mortgage lender, said UK house prices fell by 2.5 percent in March, much steeper than the 0.4 percent decline forecast and the biggest drop since September 1992.

The data confirmed expectations for a growth-boosting BoE rate cut from the current 5.25 percent this Thursday.

"It will lead to some speculation that they could go by more than 25 basis points. I don't think they will, but I wouldn't be surprised if the discussion at the meeting would be 25 or 50 rather than 25 or nothing," said Adam Cole, global head of FX currency strategy at RBC Capital Markets.

This contrasts with the ECB, which will likely leave rates on hold on Thursday> President Jean-Claude Trichet is expected to signal that the bank is not yet ready to start loosening policy.

The Fed, meanwhile, meets at the end of the month and is expected to add at least another quarter-point to the 3 percentage points worth of easing it has administered since September FEDWATCH.

Later on Tuesday the Fed will release minutes of its March 18 policy meeting that could offer clues on how far policymakers are prepared to cut the benchmark rate.

Any weakness in economic data -- such as the U.S. pending home sales for February due at 1400 GMT -- could tip the balance of expectations in favour of a bigger rate cut this month.

Traders were also awaiting Friday's meeting of Group of Seven finance ministers and central bankers, where a broad range of proposals aimed at restoring confidence in the battered banking system will likely be discussed.

On Tuesday, the Bank of England said it will offer a further 15 billion pounds of three-month funds to financial institutions and said further action could follow as needed to provide adequate liquidity to the financial system.