Sterling approached a 10-month high against the euro on Monday when worries about possible downgrades to eurozone countries knocked the single currency. The pound slipped against the dollar in early trade after news of the death of North Korean leader Kim Jong-il raised concerns about political instability in the Korean Peninsula, but solid demand from a UK bank in London trade prompted a recovery in the UK currency.
The euro slipped 0.2 percent on the day to a session trough of 83.80 pence. A fall below 83.72 pence would take the single currency to its weakest since February. Against the dollar, sterling edged up 0.1 percent to $1.5535, recovering from the day's low of $1.5465. A Swiss investor was said to be a seller of cable in early trade, traders said.
"Euro/sterling is oscillating around 84 pence and it looks it will be a slow grind below 83 pence," said Jeremy Stretch, head of currency strategy at CIBC. Signs that investors are dumping euro-deonominated assets were apparent in data from the European Central Bank on Monday, which showed portfolio investors pulled out a net 24.7 billion euros from the eurozone in October. This compared with a net inflow worth 20.5 billion in September.
The euro has fallen around 2 percent so far this month against the pound, and sterling's gains in the past two week has coincided with a paring back of net bearish positions against sterling by speculators in the week to December 13.
Sterling has benefited from weakness in the euro, but economic sluggishness and a loss of confidence in Europe is seen posing a risk to Britain, given that the EU is the UK's biggest export market and British banks have a sizeable exposure to eurozone peripheral debt.
Bank of England executive director Paul Fisher was quoted as saying on Monday the eurozone crisis posed the biggest threat to Britain's economy if it resulted in a negative shock which could push the UK into recession and deflation. Those comments weighed on sterling. On Wednesday, the minutes from the BoE's latest policy meeting will be released and is likely to show policymakers are prepared to consider further monetary stimulus in the early part of next year.
Morgan Stanley strategists who are bearish on the British pound, said in a note that asset market volatility is also likely to work against sterling. "With some key event risks this week such as consumer confidence and the MPC minutes, we expect that there could be further downside risks to GBP/USD particularly if risk remains under pressure," it said in a note.