Sterling traded close to a 16-month high against the euro on Monday with investors cautious on the single currency after more negative news on Greece over the weekend added to concerns about eurozone sovereign funding pressures. The euro held just above a trough of 82.22 pence hit over the weekend, its lowest level since September 2010.
It retreated from a session high of 82.77 pence, reached as some market players booked profits on bets against the euro, to last trade flat at 82.40 pence. Traders reported topside stops around 82.85-90 pence. Market players said the outlook for the single currency was clouded ahead of Spanish and Italian debt auctions later in the week which are seen as a key test of sentiment.
"Europe is a major driver of sterling, and every auction that is held within the euro zone is closely scrutinised these days," said Michael Derks, chief strategist at FxPro. The auctions will gauge investor willingness to invest in the troubled eurozone sovereigns after newspaper reports over the weekend added to concerns the crisis is intensifying.
German magazine Der Spiegel reported the International Monetary Fund was losing confidence in Greece's ability to work off its mountain of debt, while an adviser to the German finance minister told a Greek newspaper a 50 percent write-down on Greek debt holdings was not enough. Germany and France also warned Greece on Monday it will get no more bailout funds until it agrees with creditor banks on a bond swap and pressed for an early deal to avert a potential default. The pound has been buoyed by investors seeking refuge from the eurozone debt crisis in recent weeks, and FX Pro's Derks said that trend looked likely to persist.
Despite record low yields, analysts said the recent outperformance of the UK gilt market was more a result of concerns about the eurozone than confidence in UK economic fundamentals. UK growth was weak in 2011 and the Bank of England forecasts it will grow at an annual rate of just 0.8 percent through most of 2012, while others think it may dip into recession.
The pound climbed 0.1 percent against the dollar to $1.5451, trading within sight of the December low of $1.5361. Technical analysts said a move below that level would re-target the 2011 trough of $1.5270. Market players said the pound gained some support from a UK clearer converting dollars into sterling to pay dividends. In a note, Morgan Stanley strategists said they expected any sterling rebounds against the dollar to be limited and provide good selling opportunities.