Sterling hit a one-month high versus the dollar on Friday, boosted by gains in the euro against the US currency, but weakness in the UK economy which forced the Bank of England to pursue more easing measures kept it weak against the euro. The pound rose to $1.5853, its highest since mid-September.
A lack of UK data or events left sterling moving in lock-step with the euro, which rose after a surprisingly strong reading of US retail sales triggered demand for currencies perceived to be higher risk, including sterling. The euro hit a session high of 87.72 pence on optimism European officials are nearing agreement on a plan to tackle the eurozone debt crisis, which is taking centre stage at a meeting of G20 finance ministers and central bankers in Paris.
This week has seen sterling climb 1.7 percent against the dollar, its best performance since January, as investors have been paring back bets against a weaker pound, which have been piling up in past weeks. But analysts argue the pound remains vulnerable to selling as the economy continues to struggle while the UK central bank last week embarked on a second round of quantitative easing, under which it will flood the market with pounds, cutting demand for the currency.
"Sterling should remain reasonably biased towards the downside ... the UK economy is still very weak, the UK banking sector is still on its knees and government finances are still in a tricky way," said Peter Kinsella, currency strategist at Commerzbank. "The combination of fiscal tightening and monetary looseness always ends up in a weaker currency."
In late London trade, the pound traded around $1.5832, up 0.4 percent on the day. It was poised to end the week above $1.5784, its 100-week moving average, which technical analysts said would provide some support to sterling. The pound remained well above a 14-month low of $1.5270 hit in a knee-jerk sell-off after the BoE restarted its asset purchase scheme last week, in an effort to stimulate demand in the ailing British economy.
The subsequent recovery has been exacerbated by a squeeze of short sterling positions, but analysts said worries over the health of the British economy which had prompted more QE meant sterling would struggle against higher-yielding currencies.