Sterling hovered near a 16-month high against the euro on Tuesday, clawing back from early losses, as speculation the eurozone debt crisis will deepen kept sentiment negative towards the single currency. The pound clung to slight gains versus a broadly struggling dollar, but analysts see a risk of sterling weakness if the safe-haven US currency appreciates as the euro debt situation worsens. A weak UK economy could also knock the pound.
At the same time, the failure of Germany and France on Monday to produce an immediate solution to contain the effects of the region's debt problems highlighted risks to the euro, which could boost the pound versus the single currency. "I think GBP will stay firm against the euro but whilst holding up against the dollar, eventually the economic problems will start to weigh and we will see Cable lower," said a trader in London.
The euro traded at 82.50 pence, down marginally on the day as the single currency retreated from a session high of 82.81 pence hit in early trade. It hovered near 82.22 pence hit on Monday, its weakest since September 2010. Sterling treaded 0.2 percent higher at $1.5490 against the dollar, buoyed near a session high of $1.5500 hit earlier in the day.