Sterling slipped against the euro on Friday as increased risk appetite prompted investors to trim bets to sell the single currency, while the pound struggled after a slide in the UK's service sector highlighted the fragility of the British economy. The single currency was supported by its gains versus the dollar after data the previous day showing an improving US economy prompted investors to pick up currencies considered to be higher risk.
It rose 0.2 percent on the day to the day's high of 83.45 pence, staying above an 11-month trough of 83.02 pence hit on Wednesday. Traders said flows were extremely thin given a shortened trading day in London ahead of the Christmas holidays. UK markets will be closed on Monday and Tuesday.
The pound hit the day's high versus the dollar in early London trade, but pared those gains after data showing a drop in UK service sector output added to the view that the UK economic recovery will continue to struggle. Analysts said the pound would track moves in the euro versus the dollar, adding that the single currency had room to inch higher if investors continue to trim their short positions heading into the year-end.
"We know the speculative end of the market is short of the euro and that everyone is bearish on the euro. If you shake those positions out into Christmas and new year, you'll get a move higher in the euro versus the dollar and sterling," said Kit Juckes, currency strategist at Societe Generale.
But some traders see the pound struggling to extend significant gains beyond levels around 83.30 per euro, which is equivalent to the 1.2 euro level in sterling/euro. Sterling was flat on the day at $1.5680, pulling back from a session high of $1.5709. It traded at 81.5 versus a currency basket, having hit a 10-month high of 81.70 on Thursday.
As debt problems in the eurozone deteriorate, sterling has benefited versus the euro from perceived safety flows into UK gilts. This pushed the yield on the 10-year gilt to a record low of 2 percent on Friday.