Sterling steadied near 10-month highs against the euro on Friday as the euro zone's debt crisis cast a shadow over the single currency, but the fragile state of the UK economy could cap further gains for the pound. The mood in the euro zone remained brittle, with cuts in the credit ratings of 15 of the bloc's 17 countries threatened after a key EU summit last week offered little respite for turbulent eurozone bond markets and cash-starved European banks.
But sterling's sensitivity to risk sentiment left it vulnerable after International Monetary Fund chief Christine Lagarde said the global economic outlook was gloomy and rating agency Fitch cut UK-based Barclays along with other major banks. "The UK is heavily exposed to the financial sector and there is a good chance it could catch up with euro weakness now as we head into year-end," said Ian Stannard, head of European FX strategy at Morgan Stanley.
The pound was steady against the euro at 83.98 pence , after rising to a 10-month high on Wednesday of 83.72. Traders said a cluster of corporate euro bids were gathering around 83.30. The euro has lost around 1.8 percent against sterling this week with the single currency under widespread selling pressure, and is down roughly 2 percent from opening 2011 levels.
Heading into 2012, analysts at BNY Mellon said euro/sterling could be about to make one of its periodic break-outs after trading in a fairly tight range. "The price appears to be making a concerted effort to break down out of its well defined range (and) it could well be that a similar pattern is going to emerge again over the months ahead," said BNY Mellon in a note.
Sterling was down a touch on the day against the dollar at $1.5520, steadying above a two-month low of $1.5408 hit on Wednesday with support from real money participants taking profit on hedging positions. Technical analysts highlighted strong support around that low, coinciding with the uptrend from its 2010 trough, but the outlook was said to be negative, while below the 55-day moving average around $1.5746.