LONDON: Sterling tracked the euro higher against the dollar on Friday, though its rise was limited by concerns about a weak UK economy and the possibility of more monetary easing from the Bank of England.
The euro rose but continued to trade within recent ranges on speculation about when or whether Spain will ask for a bailout and trigger a European Central Bank plan to start buying its bonds. The gains helped lift the pound and other perceived riskier currencies.
The pound was up 0.2 percent at $1.6078, holding above Tuesday's one-month low of $1.5975 but below the peak of $1.6310 reached in late September.
"The general feeling in the market is that everyone is in wait-and-see mode because of all the 'will they won't they?' debate over a Spanish bailout request," said Alex Lawson, senior broker at Moneycorp.
"A lot of people are sitting on the sidelines and there is a reluctance to push currencies through big resistance levels."
The euro was steady at 80.51 pence, staying above a low of 80.23 pence reached on Thursday.
However, it was stuck firmly below strong chart resistance at the mid-September peak of 81.14 pence and the 200-day moving average at 81.18 pence.
"There is massive resistance at 81.00-81.20 and if the euro moves above there we could get a big move towards 84.00," said Chris Turner, head of currency strategy at ING.
But he said he expected this resistance to hold and the euro to drift lower, partly due to concerns about a weak euro zone economy.
MORE QE?
Traders said reported offers above $1.6100 were helping to cap the pound's rise against the dollar.
Sterling was expected to struggle to break back above $1.61, with recent weak UK data suggesting the economy's recovery from three consecutive quarters of contraction will be muted.
This will increase the likelihood of the BoE opting for another round of quantitative easing - effectively printing money - next month in an attempt to boost the economy, which would weigh on sterling.
Earlier this week, the International Monetary Fund slashed its forecasts to show the UK economy will shrink overall this year.
Economists' forecasts for the UK have also been cut steadily this year. And with the government doing little to spur growth, analysts say its deficit plans look tenuous. That in turn raises the risk of the UK losing its prized AAA credit rating.
Its top-notch credit rating attracted safe-haven flows during the height of the euro zone crisis and provided solid support to the pound.
"We believe sterling/dollar will remain weak, not only due to inflows reversing to outflows, but also given the weak economic cyclical position," Morgan Stanley analysts said in a note.
UK inflation data and Bank of England minutes next week will be watched closely for clues on whether or not the central bank will opt for more monetary easing at its November meeting.
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