* Sterling climbs versus broadly weaker euro
* Euro drops as investors fret over Italian politics
* Pound looks likely to benefit from safe-haven flows
By Philip Baillie
LONDON, Dec 10 (Reuters) - Sterling hit a near three-week high against the euro on Monday, with the shared currency coming under broad pressure as investors fretted over the Italian prime minister’s decision to resign.
Italian Prime Minister Mario Monti said on Saturday he would resign after the 2013 budget is approved, increasing political uncertainty in the heavily indebted country and dragging on the euro.
The euro dropped 0.1 percent against the pound to 80.44 pence. It hit a low of 80.35 pence in thin Asian trade, its lowest level since Nov. 21, although some London-based spot traders called the day’s low at 80.38 pence.
Further weakness could see the euro test the Nov. 8 low of 79.605 pence.
“Sterling is winning by default on euro weakness,” said Adam Cole, global head of FX strategy at RBC Capital Markets. “It is the rapid escalation of political risk in Italy.”
He said the euro could target the 80 pence mark as the market continued to worry about the political situation in Italy, but did not expect it to extend losses below that level.
Against the dollar, sterling gained 0.1 percent on the day to $1.6050. It held above Friday’s low of $1.6002, which was the lowest level since Nov. 30.
The pound has fallen against a broadly stronger dollar in recent sessions, with the greenback helped by faster-than-expected U.S. employment growth that prompted bets the Federal Reserve could opt for a smaller stimulus programme when it meets this week.
“Sterling is taking no independent direction, but the FOMC (Federal Open Market Committee) meeting is likely to announce some further asset purchases, in addition the market will be watching discussions on the fiscal cliff,” said Michael Derks, chief strategist at FxPro, adding that a resolution to U.S. fiscal problems would boost the dollar and drag the pound lower.
The so-called fiscal cliff, a combination of automatic tax rises and spending cuts due to kick-in at the beginning of 2013, threatens to mire the U.S. economy in recession if an agreement is not reached before the year end.
Some analysts said the pound could benefit from safe-haven flows out of the euro as market players fret over political uncertainty in peripheral countries amid speculation the European Central Bank could be considering a future rate cut.
Data on Monday showed Germany’s trade surplus was its narrowest in over six months in October after falling demand from its recession-hit European trade partners hurt its exports, also weighing on the euro.
Lower euro zone growth could fan demand for the pound, although the UK’s economic outlook was also clouded after finance minister George Osborne lowered growth forecasts in his mid-year budget statement. That raised concerns rating agencies could soon cut the UK’s prized AAA credit status.
Some analysts said immediate concerns have abated however, providing an opportunity to buy sterling against the euro.
“With immediate UK risks (the Autumn Statement) now passed and the weekend news from Monti (albeit not a huge surprise) likely to see a marginal refocus on euro zone structural concerns, we feel the time is right to re-enter a short position,” Nomura said in a note.
Nomura said they sold euro/sterling at 80.50 pence, targeting 78.00 pence, with a stop loss order at 81.70 pence. (Editing by Chris Pizzey, London MPG Desk, +44 (0)207 542-4441)