Sterling lost ground versus the dollar on Thursday, knocked by sharp falls in equity markets on weakening risk appetite, but the pound managed to outpace the euro, as the UK economy was seen holding up better than the stricken eurozone. Investor jitters over slowing global growth were heightened after data showed a plunge in factory activity in the US mid-Atlantic region, while the eurozone's debt crisis continued to undermine investor confidence in the bloc.
This put more pressure on stocks and pushed the pound down 0.6 percent against the dollar to $1.6447, but it was still not far from Wednesday's 3-1/2 month high of $1.6590. Traders said markets were thin and declining risk appetite was pushing investors back to the dollar in the near-term, but the pound was gaining some support from the perception it was the best of a bad bunch of currencies.
"Despite negative data coming out of the UK suggesting there's quite a significant cyclical downturn taking place, global investors see the UK as relatively stable from a political and ratings perspective against Europe and the US," said Ian Stannard, head of European FX strategy at Morgan Stanley.
"In the near term sterling looks likely to hold up relatively well despite a deterioration in the data, although that's more a reflection of the uncertain outlook globally." Technical analysts highlighted support at the 21-day moving average at $1.6345, while resistance for sterling is around $1.6740, the late April high. The euro was down around 0.4 percent against sterling at 86.84 pence, coming close to support at 86.70, its 200-day moving average.
Traders said the euro was hampered by the Netherlands saying it wants Greek collateral as part of the bailout package for the country, if Finland gets it. Analysts said the UK's relative shelter from the eurozone's debt crisis was helping the pound. But the UK's recent run of weak data and worries over global growth have caused some to question sterling's buoyancy.
In spite of stubborn inflation, markets expect the Bank of England to keep interest rates on hold until the end of 2012, with calls for further quantitative easing to stimulate growth. Policymakers Martin Weale and Spencer Dale both dropped their calls for higher rates this month, leaving the Monetary Policy Committee unanimous in voting for unchanged rates.