LONDON: Sterling punched a one-month high against the euro on Friday as investors cut positions in the single currency ahead of European bank stress test results, with fears the euro zone debt crisis may spread still hampering sentiment.
A lack of UK data releases or news flow left focus squarely on the euro zone. The results of Europe-wide stress tests on 90 banks are due at 1600 GMT and could force some banks to seek state aid.
Yield spreads of Italian and Spanish bonds over German benchmarks widened again on Friday, while Bund futures traded at session highs as riskier assets remained under pressure.
"The euro for choice looks a little offered here and it could be another risk-off morning," said Gavin Friend, currency analyst at nabgroup.
"But I can't get enthusiastic about a break in euro/sterling below 86.80/50 pence on the day. For those levels to break we would have to see euro/dollar below 1.38," he said.
The euro fell 0.2 percent to 87.46 pence, its lowest since mid-June. Traders said next support was around the June 16 low at 87.21. Euro/dollar traded down 0.3 percent at $1.4100.
"EURGBP could struggle to extend its drop below current levels on a sustainable basis ahead of the release of the BoE (Bank of England) minutes next week, which could signal a further shift in the balance of short-term risks from upside risks to inflation to downside risks for growth," said Valentin Marinov, currency analyst at CitiFX, in a note.
Options traders reported growing interest in bets that the euro's slide would continue. A six-month 70 pence euro put worth around 500 million euros reportedly traded in the Asian session.
Minutes from the BoE's decision to leave interest rates on hold at its policy meeting this month are due for release next Wednesday. Softer UK inflation figures this week added to expectations that rates would stay on hold well into 2012.
Sterling traded with slight losses against the dollar at $1.6124, off a three-week high hit on Thursday of $1.6195. Downside stop-losses were lurking through $1.6090 while options traders reported demand for short-dated sterling calls with strikes at $1.6230/50.
Analysts said the big market mover looming on the horizon for sterling would be the release of preliminary second-quarter GDP data due at the end of July. Early forecasts point to a sluggish reading of around 0.5 percent growth.
"All eyes will be on the Q2 GDP data the week after next which has the capacity to galvanise sterling bears," said nabgroup's Friend.
Copyright Reuters, 2011
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