LONDON: Sterling rose to a six-week high versus a weaker dollar on Friday, buoyed by reported demand from a UK clearer and gaining in tandem with the euro and equities on hopes EU leaders may come closer to resolving the euro zone debt crisis.
The pound rose one percent on the day to $1.5953, its highest since Sept. 9, after sterling demand at the 1100 GMT fix pushed it through resistance around $1.5850-55, the daily high hit three times since last Friday.
Traders said the move above $1.5850 triggered a string of stop-loss orders, helping the pound to extend its gains and taking it beyond its 55-day moving average at $1.5936. Ahead of $1.60, sterling faces minor resistance at the Sept. 9 high of $1.5991.
"Sterling has been so under the weather for so long and it may be seeing a bit of a natural correction now," said Lee McDarby, head of dealing for corporate and institutional treasury at Investec, though he said he expected it to run into offers around the $1.60 level.
"The market is likely to see a lot of volatility going into the weekend ahead of the EU summit," he added.
The pound gained along with the euro and global equity markets on optimism European leaders over the next few days will come closer to resolving the euro zone's debt crisis after Germany and France said a comprehensive deal was on its way.
The euro fell 0.25 percent to 87.03 pence, having hit an 11-day low of 86.70 pence. This lifted trade-weighted sterling to 79.9, its highest since Oct. 3.
Despite the climb, market players said the pound and other perceived riskier currencies would be vulnerable to shifts in sentiment in the run-up to the summits. Policymakers hope to make progress in tackling the euro zone debt crisis but remain deeply divided.
A German government spokesman said EU summits would be held on Sunday and Wednesday, with any decisions to come at the second of the two.
"We're pretty bearish on the outlook for the UK and global growth, risk aversion is in the ascendency and sterling will be bumping along the bottom against the dollar," said Henry Lancaster, Senior Investment Analyst at private bank Coutts.
"We're not confident on the short-term outlook for the euro versus sterling. We take the view that there are too many risks for the euro, and this weekend is just one example".
Many investors also see limited upside for sterling in coming months after Bank of England policy minutes on Wednesday hinted that more quantitative easing may be needed to prop up the UK economy. QE involves flooding the market with pounds, decreasing demand for the currency.
Adding to the gloom, CPI data released this week showed inflation at more than 5 percent, while growth in the economy remains stagnant.
"Historically, a mix of weak growth and high inflation is negative for a currency. The Bank of England is prioritising growth, which leaves the door open for more QE, which risks devaluing the currency further," said Lee Hardman, currency strategist at Bank of Tokyo-Mitsubishi.
Hardman said he expected sterling to trade around or below $1.50 in three to six months, but said it could appreciate slightly versus the euro as the currency bloc's debt crisis continues to dent investor confidence.
However, there was some encouragement as data on Friday showed the UK's public sector net borrowing excluding public sector interventions fell more than expected to 14.138 billion pounds last month.