LONDON: Sterling steadied near 10-month highs against the euro on Friday as the euro zone debt crisis shadowed the single currency, but further gains for the pound could be slowed by the UK economy being in a fragile state of its own.
The mood in the euro zone remained brittle with possible cuts in the credit ratings of euro zone countries looming after a key EU summit last week offered little respite to turbulent euro zone bond markets and cash-starved European banks.
But sterling's sensitivity to risk sentiment left it vulnerable, with the head of the International Monetary Fund Christine Lagarde saying on Thursday the global economic outlook was gloomy, and after ratings agency Fitch included the UK's Barclays in a downgrade of several major banks.
"The UK is heavily exposed to the financial sector and there is a good chance it could catch up with euro weakness now as we head into year-end," said Ian Stannard, head of European FX strategy at Morgan Stanley.
The pound was steady against the euro at 83.93 pence , after rising to a 10-month high on Wednesday of 83.72. Traders said a cluster of corporate euro bids were gathering around 83.30.
The euro has lost around 1.8 percent against sterling over the course of the week with the single currency under widespread selling pressure and is down around 2.1 percent from opening 2011 levels.
Heading into 2012, analysts at BNY Mellon said euro/sterling could be about to make one of its periodic break-outs after trading in a fairly well defined range.
"The price appears to be making a concerted effort to break down out of its well defined range it could well be that a similar pattern is going to emerge again over the months ahead," said BNY Mellon in a note.
Sterling was up slightly on the day against the dollar at $1.5532, steadying above a 2-month low of $1.5408 hit on Wednesday.
Technical analysts highlighted strong support around that low, coinciding with the uptrend from its 2010 trough, but the outlook was said to be negative while below the 55-day moving average at $1.5746.
Upward revisions announced Thursday to UK retail sales for September and October were a mild positive, but with high inflation, government spending cuts and the knock-on effects of the euro zone crisis, the outlook for the economy remained precariously balanced.
"Cable's rebound over past few days is running out of steam and I think a break of $1.5475 today would see an acceleration to the downside," said Stannard, who highlighted next week's Bank of England policy minutes as a potential hazard for sterling.
The BoE must decide by February whether to extend the four-month programme of quantitative easing asset purchases that they approved in October.
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