The safe-haven dollar along with the Japanese yen advanced as investors across asset classes cut exposure to riskier currencies and assets on worries about slowing global growth and the festering euro crisis.
Peripheral euro zone bond yields are still at elevated levels, piling on pressure on the European Central Bank to intervene and bring down borrowing costs. European leaders will meet later this week, after leaders of Germany, France, Italy and Spain agreed on a 130 billion euro package to revive growth.
The ECB's decision to ease collateral rules at the end of last week has triggered some speculation that the central bank may announce a fresh cash injection programme, similar to the ones it conducted on December and February. Those long term refinancing operations have driven the euro lower.
Expectations that the ECB will cut interest rates early next month are also weighing on the common currency.
"The euro is a bit heavy this morning against sterling and we may test 80 pence again soon," said a spot trader in London. "Honestly we cannot see a resolution being pulled out of the hat from the EU summit meeting so that will keep risk appetite subdued and the dollar will be bid on any dips."
The euro was down 0.4 percent against sterling at 80.30 pence, not far from this month's low of 80.115 pence struck on June 12. Further support for the euro was at around 79.895 pence, the low struck on May 31.
The euro has been hurt by disappointment from past EU summits and many investors are expecting the same pattern to repeat this time around.
Against the dollar, sterling was down 0.25 percent at $1.5555, with bids cited below $1.5550 and option expires at $1.5600. Apart from the dollar's broad gains due to safe-haven inflows, sterling was also hurt by talk of more quantitative easing by the Bank of England.
Speculation that the BoE will vote to expand the 325 billion pound asset purchase programme to boost growth at their July meeting has gathered pace after dovish minutes of the last policy meet released last week.
The minutes showed a very close 5-4 vote against resuming the bank's asset purchase programme this month and Governor Mervyn King was in favour.
BoE policymaker David Miles said in an interview to the Financial Times that a substantial amount of QE was needed to kickstart the "stalled" British economy..
His comments chimed with another policymaker, Martin Weale, who said that the central bank had scope for more monetary stimulus without creating inflation risks.
Quantitative easing can be seen as negative for the currency as it increases the supply of pounds in the system.
"Sterling, while remaining a safe-haven against the euro will struggle a bit against the dollar," said David Rodriguez, quantitative strategist at FXCM. "The dollar is still the ultimate safe haven, but the euro/sterling can fall towards the 80 pence mark."
Part of the reason why sterling is likely to be supported against the euro is signs from UK policymakers they are willing to take steps to protect the economy from the euro zone crisis. That is in sharp contrast to the foot-dragging that investors perceive among most euro zone decision makers.