Sterling struck a two-week high against the dollar on Friday, extending gains into a fifth straight day, although sharper gains were checked by concerns over the fragile UK economy which may require more monetary stimulus. The euro eased from two-week highs versus the dollar as traders booked some profits on this week's rally, which in turn helped the pound to recover from earlier three-week lows against the single currency.
"There's a general decent improvement in risk appetite this week and the safe-haven flight into dollars we saw at the end of 2011 is starting to unwind, which is helping sterling," said Michael Derks, chief strategist at FX Pro. Risk appetite has been underpinned this week by hopes that Greece will strike a deal with its creditors and avoid a damaging default, and by improving US economic data and loads of cash injected by the European Central Bank last month. Sterling rose to $1.5536, its highest since January 5, and was on track for its best weekly performance in three months.
Traders cited buying by a US bank and model funds in the afternoon session, which saw the pair trigger stops cited above $1.5500. Near-term resistance is at $1.5604, the 55-day moving average. Speculation that foreign investment flows could rise also shored up sentiment towards the pound, with China's sovereign wealth fund taking a minority stake in Thames Water. Sterling initially lagged the euro.
The pound slipped to a three-week low of 83.78 pence against the single currency before recovering to 83.21 pence. Broad short covering has lifted the euro away from a 16-month low of 82.22 pence hit earlier this month. Traders reported option-related offers in the 83.80 region with resistance seen at 84.22, the late December high. UK retail sales rebounded in December as shops slashed prices to tempt pre-Christmas shoppers, providing some relief at the end of a gloomy year, official data showed.
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