Sterling hit a two-month high against the euro on Thursday as the single currency came under broad selling pressure after the European Central Bank resumed bond buying. The ECB also offered a new round of funding to commercial banks but it failed to calm market worries about the eurozone's spreading debt crisis as Italian and Spanish bond yields rose.
The pound showed little reaction after the Bank of England left interest rates on hold as widely expected and stuck with a pause in its asset purchase programme, its movements largely determined by events elsewhere. The euro was down 0.4 percent at 86.80 pence, having hit 86.55 pence, its weakest since late May, which took it below its 200-day moving average around 86.64 pence.
A close below this level would be seen as a bearish signal for the euro and could signal further losses ahead. "Sterling is making slow progress against the euro, but if it can hold above technical support perhaps it will be able to push higher over the next couple of months," said Chris Redfern, senior dealer at Moneycorp.
He added that the pound may benefit as market players concentrate on debt problems in the eurozone and the United States while the UK stays off the radar. Gains against the euro also pushed sterling's trade-weighted index to 80.0, its strongest in two months. But traders said strong demand from UK importers to buy euros above 1.15 euros per pound - equating to around 86.95 pence - helped limit the pound's gains.
Sterling fell against the dollar as Bank of Japan intervention to curb a strong yen pushed the dollar higher across the board. The pound was down 0.7 percent at $1.6319. Sentiment towards the pound is likely to continue to be hampered by expectations that interest rates will stay at record lows for a prolonged period. After recent evidence of tepid second quarter economic growth, investors will be wary of any further weakness in UK data that may be seen as increasing the risk of the BoE resorting to further monetary easing.
"The BoE inflation report (due next Wednesday) will guide us as to how close we are to another round of quantitative easing," said Audrey Childe-Freeman, currency strategist at J.P. Morgan Private Bank. Sterling fell 1 percent against the Swiss franc to 1.2502 francs, taking it within sight of its record low around 1.2395, as concerns about debt and the outlook for the global economy encouraged investors to buy the Swiss currency. Against the yen, sterling rose 1.7 percent to 128.77 yen as the Bank of Japan bought billions of dollars in an attempt to stem the strength of its currency, which pushed the yen sharply lower across the board.