Sterling fell against the euro on Friday as anticipation an aid plan would be agreed for Ireland buoyed the single currency. The pound also fell against the dollar after China raised banks' reserve requirements, denting stocks and riskier currencies as concerns grew that tighter policy would dampen Chinese growth.
"There is nothing UK-specific. Sterling had benefited with the euro from the increased likelihood of an Ireland bailout package, but we are seeing a little enthusiasm being lost and now the China move is the main driver," said Ian Stannard, currency strategist at BNP Paribas.
A financial aid plan to help Ireland cope with its battered banks will be unveiled next week, EU sources said on Friday, but experts warned a rescue may not be enough to prevent contagion in the single currency bloc. The euro was up 0.7 percent at 85.65 pence, just above its 200-day moving average, currently around 85.62 pence, and last Friday's high of 85.61 pence.
On the downside, any falls are likely to be limited unless the euro breaks below its 100-day moving average at 84.66 pence and the recent low of 84.50 pence, where traders cite good support. Against the dollar, sterling was down 0.5 percent at $1.5966, well below a high for the day of $1.6095.
Analysts said it could be significant if sterling closes the week below $1.60, making it difficult for the currency to extend a recent rebound from a low of $1.5840 reached earlier this week, its weakest since late October. "There is some positioning unwinding that is weighing down on sterling," said Adrian Schmidt, FX strategist at Lloyds TSB. "We could see some choppiness heading into the US Thanksgiving week and if a solution to Ireland is put in place next week then we could see the euro and the pound bounce."
Against the dollar, technical analysts said sterling was supported around the $1.58 region, given its 55-day moving average lay around $1.5825 on Friday, while the 50 percent retracement level of the pound's rally in September-November came in around $1.58.
The pound saw some support from Bank of England policymaker Paul Tucker who said central banks must not dilute their commitment to price stability, although this was short-lived with the market's focus elsewhere. Sterling has been supported since Wednesday's minutes from the Bank of England's latest policy meeting suggested improving economic data and stubbornly high inflation would keep quantitative easing off the agenda for now. It was also helped on Thursday by data showing a recovery in UK retail sales after two months of declines, although government borrowing hit another record high.