LONDON: Sterling edged higher against the broadly weaker euro on Friday as investors trimmed bets on further quantitative easing in the UK, although it ran into some profit-taking against the US dollar, dragging it below recent peaks.
The euro drifted lower, retreating from a three-month high against the dollar, after the European Central Bank pumped more cash into the banking system and as concerns regarding Greek austerity and restructuring programme remain.
And while these worries have led to the underperformance of the euro, slightly better UK data in recent weeks has supported the pound. Sterling has also been helped by receding expectations that the Bank of England will pump more money into the economy to stimulate growth.
Earlier this week, BoE governor Mervyn King was seen to have nudged the bar for more QE higher when he told lawmakers the bank will be guided by upcoming data when deciding whether to print more money.
The euro was down 0.2 percent at 83.30 pence, which traders said was a good support level. It is the 61.8 percent retracement of the euro's rise from its January low of 82.22 pence to its recent two-month high of 85.06 pence.
Against the dollar, sterling was down 0.3 percent at $1.5910 , with option barriers at $1.60 still holding and stops cited just below its 200-day moving average of $1.5896. More stops are said to layered at $1.5875/80.
Cable hit a three-and-a-half month high of $1.5993 earlier this week and has risen for three straight sessions until Friday, leaving it ripe for a correction.
"The euro is softer and that is pulling cable lower, leaving it vulnerable towards the downside," said Adrian Schmidt, fx strategist at Lloyds TSB. "But against the softer euro, sterling has been resilient and that should hold."
Traders are now waiting for UK construction sector PMI survey at 0930 GMT. Forecasts are for a reading of 51.2, compared with a previous figure of 51.4, and a negative surprise could see sterling come under slight pressure.
On Thursday, the manufacturing PMI survey ticked down to 51.2 in February, below forecasts of 51.8, but held above the 50 level that divides expansion from contraction.
Analysts said if the more important PMI survey for the dominant services sector due on Monday also mirrored the manufacturing sector activity, sterling could come under pressure.
"UK manufacturing PMI disappointed and if this is replicated by the more important PMI services indicator, we would expect sterling/dollar to come back under pressure," Morgan Stanley strategists said in a note.
"Sterling is also expected to feel the effects of a broader scaling back of global investor optimism. Hence, we maintain our sterling/dollar bearish strategy."
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