Sterling gains versus euro on grim euro zone outlook

Fri Dec 7, 2012 6:41pm IST

* Euro falls after Bundesbank downgrades growth outlook

* Sterling vulnerable to concerns about UK rating

* Investors look ahead to U.S. non-farm payrolls at 1330 GMT

By Philip Baillie

LONDON, Dec 7 (Reuters) - The pound hit a two-week high on Friday against the euro, which came under broad pressure after Germany's central bank cut its country's growth outlook.

The Bundesbank report came a day after the European Central Bank predicted the euro zone economy would likely shrink next year, leaving the door open for future interest rate cuts, which sent the euro broadly lower.

Sterling showed little reaction to data showing UK factory output in October posted its biggest drop since June, reinforcing concerns the economy will shrink again in the final three months of the year having just exited recession.

"For euro/sterling we have had more of a euro move in reaction to the ECB meeting on Thursday but sterling has been quite resilient in terms of UK data even though production was worse than expected," said Saeed Amen, currency strategist at Nomura.

The euro fell 0.3 percent to 80.53 pence, its lowest level since Nov. 22, and dipping below support from the 200-day moving average at 80.57 pence.

It came under renewed pressure after ECB Governing Council member Jozef Makuch said the ECB may cut interest rates next year if the euro zone economy does not improve.

Market players reported bids at 80.50 and 80.30 pence that could cap further losses.

Against the dollar, sterling was down 0.2 percent at $1.6021 having retreated from a one-month high of $1.6131 hit earlier in the week.

Investors were also looking ahead to U.S. employment data at 1330 GMT. Commerzbank strategists said the dollar could rally if the number of non-farm jobs added is greater than the 93,000 forecast, as investors may pare back bets of further policy easing from the U.S. Federal Reserve.

The Fed's Open Market Committee meets on Dec. 11, when it could extend long-term asset purchases, boosting risk appetite and potentially helping the pound, Nomura's Amen said.

UK GROWTH UNCERTAIN

Some strategists said the pound's strength against the euro could be short-lived.

Investors are wary of buying sterling after UK finance minister George Osborne said this week Britain would miss debt-reduction targets, raising concerns the country could lose its prized AAA credit rating.

"Fourth quarter growth is going to be very weak in the UK and Chancellor Osborne's statement did not put a bright shine on things. Following that we have got a heavy probability of a UK (rating) downgrade and that's not going to be good for sterling," Peter Kinsella, FX strategist at Commerzbank.

Disappointing UK data could reignite the argument for more monetary easing from the Bank of England, although policymakers opted to hold fire at their meeting on Thursday.

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