LONDON (Reuters) - Sterling held steady and traded at just below its highest level in two months, as investors looked towards employment and inflation data later in the week.

The pound rose around 1.4% last week as currencies recovered against the dollar due to fading expectations that U.S. President Donald Trump will sharply ramp up tariffs in the early days of his administration. Stronger-than-expected growth data also lifted the UK currency.

Sterling was last flat at $1.2591, after rising above $1.26 on Friday to its highest since mid-December. The euro was down 0.23% against the pound at 83.19 pence.

Economic data will be key for the pound this week, after the Bank of England cut interest rates this month but said it remained cautious about price pressures.

Analysts polled by Reuters expect data on Tuesday to show average earnings growth ticked up in December while unemployment rose to 4.5%, from 4.4% in November.

Data on Wednesday is expected to show inflation increased to 2.8% year-on-year in January from 2.5% a month earlier.

"Sterling's focus this week will be on jobs data, CPI and a speech from Bank of England Governor, Andrew Bailey, tomorrow morning," said Chris Turner, global head of markets at ING.

"We continue to doubt that GBP/USD can sustain gains over $1.26 and expect it to be trading back at $1.24 by the end of March."

Investors were also keeping an eye on developments around the war in Ukraine after Trump shocked European capitals by initiating talks about a potential peace with Russia's Vladimir Putin last week.

British Prime Minister Keir Starmer this weekend became the first European leader to say he is ready to put peacekeeping troops in Ukraine.

UK sovereign bond yields rose as prices fell on Monday, with investors betting any peace deal would require higher government spending and therefore more borrowing.

(Reporting by Harry Robertson, editing by Ed Osmond)