Sterling climbs as euro hit by gloomy growth forecasts

Fri Dec 7, 2012 2:41pm 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 Nia Williams

LONDON, Dec 7 (Reuters) - The British pound hit a two-week high against the euro on Friday, with the shared currency coming 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 could shrink next year, leaving the door open for future interest rate cuts.

Strategists said the pound's strength 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.

The euro fell 0.2 percent on the day to 80.55 pence, its lowest level since Nov. 22, and dipping below support from the 200-day moving average at 80.57 pence. Market players reported bids at 80.50 and 80.30 pence that could cap further losses.

"The Bundesbank downgrade and ECB downgrade are having an effect but it's more a case of euro weakness than sterling strength," said Peter Kinsella, FX strategist at Commerzbank.

"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 downgrade and that's not going to be good for sterling."

Against the dollar, sterling was close to flat on the day at $1.6042 having retreated from a high of $1.6131 hit earlier in the week.

The next focus for investors will be UK industrial and manufacturing output data for October at 0930 GMT. Industrial output is expected to recover from last month's steep decline, but manufacturing data could show a slowdown.

"Production data for October should show a small improvement versus September and thus get Q4 off to a reasonable start. It is hard to see the data having a massive impact though, and sterling/dollar is still languishing beneath $1.6060," said RBC Capital Markets in a note.

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

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