Sterling hit a five-week high against a struggling euro on Monday as a bailout plan for Cyprus that included a tax on bank deposits sparked fears of bank runs elsewhere in the euro zone. The move, in which euro zone finance ministers demanded depositors in Cypriot banks pay up to 9.9 percent of their deposits in exchange for the bailout, was seen as setting a dangerous precedent for the shared-currency bloc.
Officials in Cyprus have suggested they will look at ways of ensuring that smaller depositors are not hit. Cyprus' parliament has postponed a vote on the plan until Tuesday. The euro was down around 1.0 percent on the day at 85.63 pence, still close to 85.32 pence hit earlier, which was its lowest since February 11 and well below last week's peak of 87.93 pence.
Against the dollar, sterling was steady at $1.5112, below a peak of $1.5177 reached on Friday after BoE chief Mervyn King surprised investors by saying the currency's decline had gone far enough. King's comments helped the pound recover from a 33-month low of $1.4832 set earlier last week. However, traders said a reportedly very large options expiry at $1.5100 due on Monday could keep it trading close to that level.
"Euro/sterling is pressured given the news over the weekend, if there is a positive vote (in Cyprus on Tuesday) there might be a relief rally but overall the outlook for the euro is negative," said George Saravelos, G10 FX strategist at Deutsche Bank, adding that the euro could likely stabilise around 85 pence. Gains against the euro helped push sterling's trade-weighted index to 79.5, its highest in nearly four weeks, BoE data showed.