LONDON: Sterling rose to a three-week high against the euro on Friday as the single currency stayed under pressure after the European Central Bank European Central Bank was forced to back off its policy of rising interest rates.
Analysts said concerns about a deepening euro zone debt crisis could help sterling rise further versus the euro, but a fragile UK economy and the risk of more stimulus from the Bank of England were seen limiting gains.
The euro fell 0.1 percent to 86.85 pence; it’s weakest since August 19, leaving open the potential for a test of the August 19 low of 86.54 pence and the early August low of 86.44 pence.
The pound gained sharply on Thursday on relief that the BoE held back from adopting more quantitative easing, as some in the market had been positioned for. The vast majority of economists had thought it would hold off for now, but the minutes to the policy meeting later this month may reveal an increased debate.
"Sterling will remain driven by any renewed pressure on the euro or any further selling against the dollar but it is likely to bounce around in fairly familiar territory," said Geraldine Concagh economist at AIB Group Treasury in Dublin.
She added that the pound may have some room for more gains as investors sought alternatives to the euro, but said the scope for this was limited.
"The UK has a lot of problems of its own, with the economy sub-trend and really struggling, while the market keeps pushing back expectations for an interest rate rise. All of these will continue to weigh on sterling."
Sterling also stayed near to a two-month low against the dollar, remaining below the psychologically important $1.60 level. It was last up 0.1 percent at $1.5966, within sight of a two-month low of $1.5914 hit on Thursday.
"The pound continues to find an element of support at these lower levels having found support at $1.5920/30 earlier in the week. A break below this support level opens up the July lows at $1.5780," said Michael Hewson, analyst at CMC Markets.
UK producer prices data at 0830 GMT is expected to have little impact on sterling, although it will be watched given that a marked fall in inflation would be seen as potentially opening the door to more easing by the BoE.
The data is expected to show input price inflation easing sharply in August, reflecting a drop in oil prices and a modest strengthening in sterling, while factory-gate inflation is also expected to slow.
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