LONDON: Sterling hovered just shy of an earlier 3-1/2 year high against the euro on Wednesday as euro zone political and economic worries encouraged investors to buy the currency, buoying its trade-weighted index to its highest since August 2009.
Most analysts expect the pound to continue to gain as concerns grow that political uncertainty in Greece and a French leadership change may undermine austerity plans key to tackling the euro zone debt crisis.
The euro traded at 80.44 pence, just above a low of 80.35 pence hit in Asian trade, its weakest since November 2008.
This pushed sterling's trade-weighted index up to 84.0 , Bank of England data showed. The pound's rate against the euro makes up around 50 percent of this index.
"This is primarily a safe-haven story. As long as concerns remain about Greece sterling will remain supported," said Adrian Schmidt, currency strategist at Lloyds.
However, traders cited options barriers at 80.25 pence per euro and at the psychological 80.00 pence level which may slow the pound's gains.
And although investors' focus was on developments in the euro zone, a survey showing British retail sales posted their biggest fall in more than a year last month marginally dampened sentiment towards the pound.
Analysts said this could make some investors wary before a Bank of England decision on Thursday.
Although most economists expect policymakers will leave their asset purchasing target under their quantitative easing programme unchanged due to inflation concerns, a minority see a chance they will opt for another increase.
This could weigh on sterling, particularly against the US dollar, which has gained across the board as investors have shunned riskier assets due to the problems in the euro zone.
The pound was steady at $1.6155, not far from a two-week low of $1.6115 hit on Monday.
"We do not expect it but there is a small risk of the BoE doing more QE and sterling could come under pressure before the decision," Lloyds' Schmidt said.
The British Retail Consortium said on Wednesday that like-for-like retail sales plunged by 3.3 percent in value terms compared to April 2011. Another survey showed growth in the number of people placed in permanent jobs in Britain slowed.