Sterling rallied against a tumbling euro on Friday as talk of an imminent downgrade to some eurozone countries prompted a sell-off in the single currency, which in turn hit risk sentiment and knocked the pound to a 17-month low versus the dollar. A senior eurozone government source said ratings agency Standard & Poor's was poised to cut the ratings of several countries later in the day - not including Germany - following through on a warning made in December.
The pound climbed against the single currency, which fell roughly 1 percent on the day to a session low of 82.78 pence. The euro hovered within sight of Monday's trough of 82.22 pence, the lowest level since September 2010. But sterling dropped versus the dollar, tracking a fall in the euro/dollar trading pair, as jittery market players concerned about an escalation in the euro zone debt crisis reached for the safe-haven greenback.
Sterling hit its lowest level since late July 2010, falling around 0.7 percent to $1.5234 after breaching a reported options barrier at $1.5250. Support is seen around $1.5190, the 61.8 percent retracement of sterling's 2010-2011 rally. "In this sort of environment it does not take much to knock the euro, it is in an extremely vulnerable position," said Jane Foley, senior currency strategist at Rabobank.
The single currency, and wider risk sentiment, also came under pressure earlier in the day after an Italian debt auction that saw reasonable demand but did not match the stellar sale of Spanish bonds the previous day. Italy sold 4.75 billion euros in debt but failed to attract the level of demand that had been expected. Analysts said the pound could come under pressure in the near term as expectations grow that the Bank of England will ease monetary policy further and worries increase that the UK economy may be heading towards recession.