Sterling hit a 3-1/2 month high against the dollar on Friday, putting it on track for its best weekly performance since mid-January, as investors wary about funding problems in the eurozone and a recession in the US preferred to buy the pound. But Britain's own struggles with an patchy recovery, and prospects that the Bank of England could also resort to more quantitative easing is likely to keep a lid on gains.
In an environment where investors are increasingly wary about sovereign debt risks, the pound drew some support from data which showed Britain's public finances posting an overall surplus in July, pushing down overall borrowing this fiscal year and bringing the government closer to its fiscal targets. Sterling was up 0.6 percent at $1.6614, having hit a fresh 3-1/2 month high of $1.6618. It recovered smartly from a session low of $1.6444, leaving it on target for its best weekly performance since mid-January. It triggered buy stops above $1.6600 on its move higher.
"Given the focus on the euro zone's sovereign debt problems and slowing growth in the US, the focus is off the UK for now," said Lauren Rosborough, currency strategist at Westpac. Mounting fears of a global recession and concerns about rising funding stress facing some large European banks saw global stocks extend a slide. European bank shares fell sharply and these concerns have weighed down on riskier currencies like the Australian dollar.
"Given the renewed demand for safe-haven currencies, sterling has fared quite well," said Michael Derks, strategist at FXPro. "Sterling is the least bad of the big currencies, but economically the country is still completely stuck in neutral." Traders cited talk the pound has had support from a large M&A deal, with Hewlett-Packard bidding $11.7 for British enterprise search-software maker Autonomy.
Against the euro, it eased, although traders cited offers to sell the common currency at higher levels. Despite its losses, sterling stayed near a 12-week high, boosted by concerns about a worsening euro zone debt crisis. The euro was up 0.2 percent at 86.96 pence, holding above its 200-day moving average at 86.70 pence and not far from the August 5 low of 86.44 pence, below which would mark its weakest since late May. Traders said offers above 87 pence could check gains.