LONDON: Sterling dipped to a one-month low against the euro on Monday, undermined by weak UK data and expectations of future action by the European Central Bank to lower Spanish and Italian borrowing costs.
The euro stuck a one-month high of 79.475 pence before easing to 79.265 pence, marginally higher on the day. A break above its 55-day moving average at around 79.70 could leave it on track to test 80 pence in the near term, traders said.
Last week the common currency posted its biggest weekly gain against the pound since late February as investors cut hefty short euro positions. Its latest rebound dragged sterling's trade-weighted index to its lowest in more than three weeks, data from the Bank of England showed.
The single currency has bounced from steep losses on disappointment the ECB took no immediate action last Thursday to tackle the debt crisis, after traders questioned whether the falls may have been overdone.
The ECB said last week it may soon resume its programme of buying government bonds of struggling euro zone countries, leading to some optimism that European authorities would act to dampen bond yields in Italy and Spain.
"The fact that this backstop is now being created will serve to substantially reduce risk premia on European assets as well as the euro, even before the details are worked out," said George Saravelos, currency strategist at Deutsche Bank.
While this may mean a larger ECB balance sheet, in the near term lower risk premiums for European assets and a market significantly bearish on the euro, meant the common currency could bounce, especially against sterling which was vulnerable to weak UK growth and a large current account deficit.
"It is now time to turn tactically bullish euro and expect it to hit 81 pence against the pound," he said.
Fresh data on Monday showed British house prices falling at a slightly faster pace than economists forecast, highlighting the sluggish state of the economy..
That followed figures late last week showing growth in Britain's dominant services sector slowed more than expected in July.
The data boosted chances of further asset buying by the Bank of England and kept sterling on the backfoot. Sterling was down 0.3 percent at $1.5595, with traders citing option expiries at $1.5600 and support at its 55-day moving average of $1.5584.
"Sterling is likely to struggle ... ahead of Wednesday's quarterly Inflation Report, where the BoE is likely to downgrade growth projections, opening the door for further unconventional policy," Morgan Stanley said in a note.
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