Sterling slips from three-month high against euro as traders watch French bonds

LONDON, Oct 6 (Reuters) - The pound eased against the euro on Tuesday as French bonds rallied from the previous session's fall that helped propel sterling to an almost three-month high.

The euro fell sharply on Monday as investors worried that a dramatic fall in French bonds due to concerns about public debt and a looming election was spreading to other markets such as Italy.

Yet French bonds rose on Tuesday, pushing yields lower and helping currency markets stabilise.

The euro was last up 0.1% at 84.88 pence after hitting an almost three-month low of 84.61 pence on Monday following seven straight sessions of declines.

Sterling was around 0.1% higher against the dollar at $1.322.

Aside from euro zone bond markets, the focus for UK traders is likely to be on Bank of England officials this week.

Catherine Mann, who voted to raise rates in July and September, said on Tuesday that inflation has become embedded in the UK.

Governor Andrew Bailey is among a handful of BoE policymakers speaking on Thursday.

The central bank has so far held rates during the Iran war-driven spike in energy costs but traders currently price in around an 80% chance of a rate hike in November and around 100 basis points of total monetary tightening by the end of next year.

Later this month, the British budget could cause swings in sterling and domestic bond markets.

Morgan Stanley on Tuesday said the pound appears to be pricing in too little fiscal risk ahead of the budget on October 28 and recommended betting on sterling to fall, saying it was targeting a drop to $1.285.

"With so many medium-term decisions yet to be made, a challenging tax-hiking arithmetic and relatively benign expectations from market participants around this Budget — at least per our conversations — we see more pronounced downside than upside risks," the bank's strategists wrote in a research note.

(Reporting by Harry RobertsonEditing by Tomasz Janowski)