Sterling hit its highest in over a year versus a broadly weaker euro on Wednesday as investors concerned by eurozone sovereign funding requirements sought to diversify funds out of the single currency in favour of perceived safer alternatives. But the pound retreated from early gains against a firmer dollar which rose amid weakness in equity markets, with traders citing hefty sterling offers, including those from Middle Eastern participants and retail investors.
Against the euro, sterling was bolstered by the view that the UK economy, for all its weaknesses, was doing better than the eurozone, which is heading for recession amid huge uncertainty over the ability of highly indebted countries within the bloc to raise funds. The euro fell to 82.64 pence, its lowest since September 2010, after stop-losses placed around support at 82.85 were hit. More euro weakness was likely in coming weeks which see a heavy calendar of euro debt supply.
"My target for EURGBP is 82.50 with further downside vulnerable should the upcoming (eurozone) debt sales disappoint," said a London-based spot trader. Germany found adequate demand at an auction of 10-year government bonds on Wednesday, but key tests will come when Italy and Spain issue bonds next week.
Analysts said investors continue to prefer the pound versus the euro, but added that it remained at risk of selling versus the dollar if more signs start to show that Britain may also slip into a recession this year. "Maybe the UK is approaching a consensus (for a recession) but it's not there yet. And there's no break-up risk, so people are more willing to allocate funding from a passive perspective at the start of the year," said Geoffrey Yu, currency strategist at UBS.
However, he added that UBS remained negative on sterling in the longer term. Sterling was down 0.2 percent against the dollar at $1.5606, retreating from an earlier climb to a session high of $1.5669. Traders said they were seeing strong interest to sell the pound in favour of the dollar since the start of the week, adding that offers around $1.5700 would limit the upside.