LONDON: Sterling was steady against the dollar and the euro on Wednesday ahead of UK labour market data but could be vulnerable to selling pressure if weak unemployment numbers reinforce expectations for more quantitative easing in coming months.
Hopes that Greece and its creditors could avoid a costly default also supported sentiment towards the common currency as talks between the two sides were set to resume talks. Still, the euro's outlook was at best fragile, with a senior official at Fitch warning that a two-notch downgrade of Italy was an option. Against the dollar, sterling was flat at $1.5335, staying well above Friday's trough of $1.5234, its lowest level since July 2010. It had earlier extended gains into a third straight session on buying by Middle East investors and traders cited stop-losses above Friday's high of $1.5410. Option expiries at $1.5400 are also likely to sway trade, dealers said.
The euro was steady at 83.10 pence, having hit a high for the day of 83.33 pence. Traders reported large offers placed at 83.30/40 pence that could cap gains.
Analysts said another set of weak UK data on Wednesday could see investors initiate fresh bearish positions against sterling.
Data due at 0930 GMT was expected to show the unemployment rate held at a 15-year high of 8.3 percent while the claimant count is expected to rise for a ninth straight month.
"The numbers will no doubt paint a difficult picture facing the UK," said Jane Foley, senior currency strategist at Rabobank. "It will potentially increase the case for more QE by the Bank of England. But having said that, events in the euro zone will remain the main driver for sterling in coming days."
On Tuesday data showed British inflation fell sharply in December, with the annual CPI rate dropping to 4.2 percent from 4.8 percent in November, supporting the Bank of England's view that consumer price inflation may have peaked.
The weaker reading added to expectations the BoE will increase asset purchases under its quantitative easing programme next month. Clear evidence of falling prices is a precondition for some BoE policymakers to back QE expansion.
Morgan Stanley strategists said in a note that they had used sterling's rebound on Tuesday to initiate fresh bearish bets. They have entered into a short position at $1.5390 with a target of $1.4800 with stops at $1.5490.
"Today's UK labour market report also has the potential to provide negative news, where market expectations are for just a moderate rise in the claimant count," they said in a note.
But sterling is likely to stay supported against the euro with many analysts sceptical about how much further the euro could gain given rising concerns about the euro zone debt crisis.
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