LONDON: Sterling hovered near 10-month highs against the euro on Monday, underpinned by worries about possible downgrade to euro zone countries, although the fragile state of the UK economy and waning risk appetite saw it lose ground versus the dollar.
Appetite for currencies perceived to be riskier and assets like stocks suffered on the news of the death of North Korean leader Kim Jong-il. The mood in the euro zone also remained brittle, with cuts in the credit ratings looming after a key EU summit earlier this month offered little respite for turbulent euro zone bond markets and cash-starved European banks.
The euro was flat at 83.97 pence, not far from a 10-month low of 83.725 pence with offers cited above 84.25. Against the dollar, sterling was down 0.1 percent at $1.5500, with investors veering towards the safety of the dollar and the yen ahead of the year end.
"Euro/sterling is oscillating around 84 pence and it looks it will be a slow grind below 83 pence," said Jeremy Stretch, head of currency strategy at CIBC.
"There is a wall of negativity surrounding the euro. Within Europe, investors are still preferring the liquidity that sterling offers, given all the structural problems facing the euro zone."
Indeed, data from the European Central Bank on Monday showed portfolio investors pulled out a net 24.7 billion euros from the euro zone, compared with inflows worth 20.5 billion in September, boding ill for the common currency.
Later in the day Eurogroup finance ministers will discuss pumping in funds through bilateral loans to the IMF to help countries struggling with debt. But analysts say there are doubts on a number of issues including how much each European country, including Britain, will be asked to fork out.
Currency speculators have trimmed net bearish positions against sterling in the week to December 13, but overall sentiment towards the British pound remained fragile given the UK's exposure to the euro zone.
The EU is Britain's biggest export market and British banks have a sizeable exposure to euro zone peripheral debt.
On Wednesday, the minutes from the Bank of England's latest policy meeting will be released and is likely to show that policymakers are prepared to consider further monetary stimulus in the early part of next year.
A private sector gauge of consumer confidence will also be released on Wednesday and is expected to a show a slight deterioration in December.
Morgan Stanley strategists who are bearish on the British pound, said in a note that asset market volatility is also likely to work against sterling.
"With some key event risks this week such as consumer confidence and the MPC minutes, we expect that there could be further downside risks to GBP/USD particularly is risk remains under pressure," it said in a note.
Sterling hit a two-month low of $1.5408 last week before drawing support from real money investors. Technical analysts highlighted strong support around that low, coinciding with the uptrend from its 2010 trough, but the outlook was said to be negative, while below the 55-day moving average around $1.5746.
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