LONDON, Sept 6 (Reuters) - The pound trod water on

Friday, ahead of U.S. employment data that could intensify

volatility later in the day as investors figure out whether the

Federal Reserve will be forced to deliver an outsized rate cut

this month or not.

Sterling, which is heading for a 0.3% rise against

the dollar this week, was trading 0.1% lower on the day at

$1.3169. It touched a one-week high of $1.31925 earlier in the

day.

The euro was up 0.1% against the pound at 84.35

pence, while the yen - a major beneficiary this week of

safe-haven flows - strengthened, leaving sterling down 0.5% on

the day at 187.90 yen.

Economists surveyed by Reuters expect 160,000 workers were

added to U.S. nonfarm payrolls in August, after July's 114,000

increase. It was this report which ignited concern that the U.S.

economy is slowing rapidly, which prompted a major selloff in

risk assets in early August.

Futures show traders are pricing in as many as 100 basis

points in Fed rate cuts over the remainder of this

year, compared with less than 45 bps from the Bank of England

. This anticipated gap has helped fuel a rally in

recent weeks in sterling at the expense of the dollar.

Currency market action on Friday was firmly dictated by the

dollar ahead of the payrolls numbers.

"The dollar is weak as we lead up to today's report and it

is lower vs. all other G10 FX currencies since the most recent

bout of risk aversion, which did not boost the dollar as a safe

haven. This suggests that when the market's fears are centred

around the weak outlook for the U.S. economy, the dollar tends

to struggle," XTB research director Kathleen Brooks said.

Next week brings more UK-specific catalysts for sterling,

including a monthly report on British employment that contains

data on wage growth - a key focus for the Bank of England, which

has expressed concern about persistent inflation in pockets of

the economy, such as services and salaries.

Speculators are sitting on a fairly sizeable bullish

position in sterling futures, worth $7.45 billion, according to

weekly data from the U.S. markets regulator. That's

only narrowly below July's record of $11.468 billion, meaning

that any data that undermines the argument for the BoE to keep

UK rates higher for longer could trigger a selloff in the pound.