Sterling rose versus the euro and erased earlier losses against the dollar on Monday after Spanish bank Santander's 1.3 billion pound bid for smaller British rival Alliance & Leicester. The news boosted confidence in Britain's embattled banking and housing sectors, where firms had recently struggled to secure funding.
Concerns about these sectors have been one of the key factors pushing sterling lower this year. "The only thing which is moving it (sterling) today is the Alliance & Leicester news," said Adam Cole, global head of FX strategy at RBC Capital Markets.
"Both directly, as obviously that would be an M&A inflow into the UK from Europe ... and probably more so indirectly in that it is lifting confidence slightly in the UK financial sector," he said.
By 1401 GMT the euro was down 0.4 percent on the day at 79.83 pence. The pound was trading steadily against the dollar at $1.9904, having recovered from an earlier session low of $1.9816. The US currency had initially rallied after the announcement of emergency measures to shore up troubled US mortgage agencies Fannie Mae and Freddie Mac. UK data on Monday showed core producer output prices rising a smaller than expected 0.3 percent on the month in June, with May figures revised upwards.