LONDON: Sterling reached its strongest in a month against the euro on Friday, with Russia and Greece posing the main potential risks to a market thinning out before the Christmas holidays.
The pound got a shot in the arm from retail sales numbers on Thursday that showed British consumers spent with gusto in November. Sales rose 1.6 percent on the month compared with a forecast 0.3 percent.
If that continues into Christmas, it will suggest the economy is headed for the stronger growth, and real wage rises, needed to persuade the Bank of England to raise official interest rates next year.
By contrast, the threat of a bigger economic crisis in Russia is hanging over a euro zone economy generating little optimism, inflation or growth.
"I think Russia still bears watching over Christmas because oil has not bottomed out. A dip in Brent prices below 60 dollars means that financial stability and economic stability is still at risk," said Phyllis Papadavid, a currency strategist with BNP Paribas in London.
"The euro looks like it is going to trend a bit weaker on the crosses and against the dollar." BNP sees sterling strengthening to 77 pence per euro in the first quarter compared with 78.48 pence on Friday. The euro hit a low of 78.315, its lowest since Nov. 12, earlier in the day.
Papadavid also said she saw the pound holding around $1.53-$1.56 over the next few months, compared with $1.5670. Diminishing expectations the BoE will raise interest rates have been at the heart of sterling's fall against the dollar since July.
Concern over next May's parliamentary elections are also a factor.
Polls suggest neither major party may be able to put together a majority coalition. Depending on who eventually wins power, a referendum on whether to leave the European Union may follow.
"I expect things to calm down into Christmas now," said one London-based dealer. "We will probably see a ramping up of the political talk in the new year, which clearly carries some risks."
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