Sterling traded within sight of a near 18-month low against the dollar on Monday and looked likely to stay on the back foot as investors concerned about the implications of euro zone ratings downgrades favoured the safe-haven US currency. The pound was firm against the euro, however, hovering close to a 16-month high as the downgrades coupled with fresh concerns about a Greek debt default weighed broadly on the single currency.
Movements in sterling and other currencies were limited in the aftermath of the ratings cuts. Analysts said the impact could have been greater but as S&P was following through on a warning made last month, much of the move was already priced in. "If we were to see the start of a downward spiral, and any further loss of confidence in the euro zone started to materialise, that would have a broader negative impact for the euro and riskier currencies in general," said Lee Hardman, currency economist at Bank of Tokyo-Mitsubishi UFJ.
A further dip in risk appetite could see sterling test 82.22 pence against the troubled euro, its highest level since September 2010, while slumping along with other perceived riskier currencies against the dollar. Sterling was almost flat against the dollar at $1.5307, holding above Friday's trough of $1.5234, its lowest level since July 2010. Traders cited some supportive bids from Middle East investors. The euro was also flat against sterling at 82.70 pence.