LONDON: Sterling pared gains against the dollar on Friday, retreating from a session high hit on speculation of a Chinese investment vehicle providing funding to euro zone countries, as risk sentiment wavered following a European summit.
The pound tracked moves in the euro during a choppy session, reflecting uncertainty over the outcome of an EU summit that did little to impress markets overnight.
Sterling was last trading almost flat at $1.5645. It retreated from a session peak of $1.5735 reached after a source said China planned to create a $300 billion foreign exchange vehicle, part of which would be focused on Europe.
"Sterling is going sideways. It's failed to hold on to its gains but I think that's a scaling back of risk more than an anti-sterling sentiment," said Richard Wiltshire, chief FX broker at ETX Capital.
"The market was expecting big things out of this (EU) meeting and it's been a bit of a disappointment".
Against the euro, sterling stayed within sight of a one-month high. The pound has been benefitting from investors seeking euro alternatives due to the region's debt crisis.
Some traders and analysts said it may struggle to advance short-term, however, particularly if sentiment towards the euro improves, with strong support for the euro seen around 85 pence.
"The euro has pushed down to levels against sterling that might prove attractive from a trade or technical point of view and the bias for the moment is for it to hold in an 85.00-86.50 pence range," said Steve Barrow, currency strategist at Standard Bank.
"But I still see an undertone of weakness in the euro against all currencies, including sterling," he said, adding he expected the euro to drop to around 75 pence in a year's time.
The euro was up 0.1 percent at 85.43 pence, but hovering near a one-month low of 84.96 pence hit on Thursday. Another break below 85 pence would leave it set to fall below the Nov. 10 low of 84.86 pence, marking the euro's weakest level since March.
Technically, the euro's outlook will be seen as bearish if it closes below its 200-week moving average at 85.70 pence. Meanwhile, more falls versus the dollar may see sterling target the Dec. 6 low of $1.5562 and the late November low of $1.5423.
EU SUMMIT
EU leaders agreed stricter budget rules for the euro zone but failed to secure changes to the EU treaty among all 27 member states. Countries also failed to reach an agreement on giving a banking license to the euro zone's permanent bailout fund, limiting its firepower.
"The talks last night did not go as far as markets were hoping. They agreed some elements of fiscal union but were short on treaty change," said Geraldine Concagh, economist at AIB Group Treasury in Dublin.
"Versus the dollar, sterling's moves will be driven by market sentiment, but there may have been a shift in sterling against the euro and the break below 85.00 (in euro/sterling) could be significant," she said.
Britain said it could not accept proposed amendments to the EU treaty after failing to secure concessions for itself.
Analysts said this may be positive for sterling if a proposal from the EU for a tax on financial transactions does not impact the UK -- where financial sector health is important for the economy -- but there were also concerns the UK would be left isolated within Europe.
Sterling showed little reaction to data showing record exports helped narrow Britain's trade deficit at its fastest pace since records began in October. Analysts said they remained concerned that euro zone turmoil and weak demand at home would threaten an economic recovery in the UK.
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