LONDON: Sterling rose to a 20-month high against the euro and hit its highest in almost six months versus the dollar on Tuesday as it remained a popular alternative to a troubled euro, leaving it poised for more gains.
The pound has performed strongly in recent days on the back of data showing an improvement in the UK economy and with dimming expectations that the Bank of England will opt for a further bout of quantitative easing via asset purchases.
This comes against the backdrop of political uncertainty in the Netherlands and France, growing worries about the economic outlook for the euro zone and worsening debt problems in peripheral countries, especially Spain. As a result, many analysts see sterling gaining further towards 80 pence per euro.
The euro fell to 81.435 pence, only just above a low of 81.43 pence hit in August 2010.
More gains for the pound would see it target the June 2010 high of 80.67 pence per euro, beyond which would mark levels not seen since the aftermath of the Lehman Brothers collapse.
"There is generally a bid tone for sterling against the euro. Before the end of the second quarter I'd expect to see euro/sterling around 80 pence, if not lower," said Michael Derks, currency strategist at FXPro.
"There is a tendency among investors not to have too much currency exposure to the euro, so receivables in euros are getting hedged into other currencies and sterling is one of them."
Barclays said they have raised their forecasts for sterling, and now see it strengthening to 79 pence in three months and to 76 pence in 12 months (from previous forecasts of 84 pence and 80 pence respectively), based on a more favourable UK economic outlook.
"Upside risks to our very weak UK growth outlook and sticky inflation mean the Monetary Policy Committee's current stance may be too accommodative," their analysts said in a note to clients.
Sterling has posted solid gains since Bank of England minutes last week suggested it would not inject more monetary stimulus into the economy as it fears inflation will now be greater than expected.
Figures on Tuesday showed Britain's public sector budget deficit was higher than expected in March, though downward revisions in previous months meant the government met its full-year target.
UK GDP DATA A RISK
Against the dollar sterling rose to $1.6159, its strongest since Oct. 31, 2011. The pound's trade-weighted index also matched Monday's high of 83.2, its highest level since August 2009, Bank of England data showed.
But traders said it may struggle to extend gains versus the US currency, with stiff chart resistance from a trendline drawn from a high in late December at $1.6163, while just above that is the late October high at $1.6167.
Sterling may be hampered by key data on Wednesday, when the first estimate of UK first quarter gross domestic product will show whether the economy avoided a recession.
It is expected to show the economy grew a modest 0.1 percent after shrinking 0.3 percent in the final quarter of 2011.
Some analysts see a risk of GDP showing a further contraction due to very weak construction output and this could weigh temporarily on sterling. However, it may only be short-lived given a much more worrying euro zone economic outlook.
"GDP data will set the starting point in terms of whether there will be more QE. It will show whether the economy is improving and give a sense of the trajectory of growth going forward," said Lauren Rosborough, currency strategist at Societe Generale.
SocGen sees euro/sterling falling to 80 pence in the medium term, though Rosborough said the pound could struggle to vault $1.62 against the dollar.
Investors became more wary about the euro as the Netherlands' governing coalition collapsed after failing to agree budget cuts, and on worries about the outcome of next month's French presidential election
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