Sterling turned higher against the euro on Monday, edging close to a six-week high as investors turned sceptical about a last-minute bailout deal for Cyprus. The deal removed the immediate threat of financial meltdown, initially boosting the euro, but there were concerns about the precedents set by an agreement which will inflict heavy losses on uninsured depositors.
The euro was down 0.5 percent at 84.85 pence, just above Friday's low of 84.84 pence, then the February 11 low of 84.42 pence. "The Cyprus headlines helped euro/sterling, but it is getting scooped up above the 85 pence level and could drop towards the 84.40 area," said Richard Driver, analyst at Caxton FX.
Cyprus agreed with the European Union, the European Central Bank and the International Monetary Fund on a plan that will shut down its second-largest bank and impose a potentially large levy on deposits above 100,000 euros. "There is a degree of uncertainty about the Cyprus deal and there has to be concern about the possibility of flight out of peripheral euro zone assets," said Jeremy Stretch, head of currency strategy at CIBC.
The euro extended losses against the pound after Eurogroup chairman Jeroen Dijsselbloem said the Cyprus rescue was a new template for resolving euro zone banking problems and other countries might have to restructure their banks. It was last down 0.3 percent at $1.5183, off a one-month high around $1.5259 hit in the wake of the Cyprus agreement. The UK currency tends to do well against the safe-haven dollar when investors feel confident.
Ratings firm Fitch warned on Friday it may follow Moody's and cut the UK's triple-A sovereign credit rating. Data on Monday showed a drop in UK mortgage approvals. "There could be a further recovery for sterling if recession is avoided in the UK, but progress will be slow due to the lack of progress in the UK on debt and weak growth," Caxton FX's Driver said.