Sterling fell to a near four-week low against the euro on Thursday on hopes of progress in Greek debt talks and worries about UK economic weakness, but the pound hit a five-week high against a broadly weaker US dollar. Reports that private holders of Greek debt would accept a lower coupon on new bonds, and a successful short-term debt auction in Italy, encouraged investors to cut hefty short positions in the euro.
Sterling also came under pressure versus common currency on expectations the Bank of England will resort to further monetary stimulus. Those expectations have increased after data on Wednesday showed the UK economy contracted by 0.2 percent in the fourth quarter of 2011, putting it on the brink of recession.
The euro rose around 0.3 percent on the day to 83.99 pence, its strongest since December 30. Traders cited offers around 84 pence which capped near-term gains in the single currency as it eased back to 83.70. Resistance was the December 29 high of 84.22. However, sterling rose against the dollar, buoyed as the US currency came under broad selling pressure after the Federal Reserve said on Wednesday it would keep interest rates near zero until late 2014 and may opt for more stimulus.
"There's been a big selling of US dollar positions since the Fed and, just by sheer weighting of money, the euro has benefited more than the pound," said Adam Myers, senior market strategist at Credit Agricole. But he saw the euro's strength as temporary and expected safe-haven flows into sterling to continue as investors fret over the euro zone crisis. Against the dollar, sterling rose to $1.5719, its strongest since December 22. Further gains could see it target the December 21 high of $1.5775, though traders cited offers at around $1.5730. Sterling was trading around $1.5693 late in the London afternoon.
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