LONDON: Sterling was subdued near three-week lows against the euro on Thursday, with investors wary of initiating large positions ahead of policy decisions from the European Central Bank and the Bank of England later in the day.
A slew of soft UK data recently have kept investors nervous about the possibility of monetary easing by the BoE, although few expect the bank to move as early as Thursday. The BoE will announce its decision at 1100 GMT and is widely expected to keep rates on hold and its quantitative easing programme unchanged.
But more importantly, the focus will be on the ECB meeting, where expectations for decisive action have risen after President Mario Draghi said last week he would do everything to preserve the euro.
That has supported the euro in the past few days and traders said if Draghi followed up his words with action, investors will unwind large bearish positions against the euro and push the common currency higher.
On the other hand, any disappointment from the ECB could see the euro drop sharply against most major currencies, including the British pound. It will also hurt sentiment towards riskier currencies and assets and would weigh on sterling against the safe-haven US dollar.
The euro was up 0.25 percent at 78.87 pence, extending gains into a third straight session on Thursday and not far from its three-week peak of 78.94 struck on Wednesday. It has pulled away from a near four-year low of 77.56 pence struck on July 23 with investors wary that a short squeeze could lift the euro to 80 pence in the near term.
The pound's losses against the euro saw sterling's trade-weighted index pinned to a three-week low of 83.8, data from the Bank of England showed.
Against the dollar, sterling was flat at $1.5540 with the pound drawing some support from Asian central banks who were early buyers in the London session. The dollar was clinging on to gains after the US Federal Reserve refrained from providing additional stimulus.
"In the very near term, potential policy action from the ECB later today could help euro/sterling squeeze further to the upside," said Valentin Marinov, currency strategist at Citi.
"However, with the eurozone debt crisis far from over, we still see the cross consolidating rather than rallying from here. Over the longer term, we continue to expect more sterling downside against the dollar and the yen especially if concerns about the euro resurface."
Many investors are cautious about sterling given the UK's strong trade links with the region. The sharp downturn in the euro zone has kept the UK mired in a recession with latest manufacturing activity offering little solace.
A PMI survey on Wednesday showed Britain's manufacturing sector shrank at its fastest rate in more than three years in July.
On Thursday, the construction sector PMI will be released, and activity is forecast to have contracted in July. The index is forecast to drop to 48 from 48.2 and a weaker number might weigh on the pound, traders said.
These numbers come amid more signs that the housing sector is struggling, all of which is likely to keep alive speculation of more easing by the BoE.
The minutes to the BoE's policy meeting in July showed policymakers were softening their stance on cutting interest rates, though any move was not likely to come for several months.
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