* Euro moves away from three-week low vs pound
* Spanish budget seen paving way for bailout request
* EU farm subsidy payment supports sterling
By Nia Williams
LONDON, Sept 28 (Reuters) - The euro edged higher against sterling on Friday after investors gave a cautious welcome to Spain’s 2013 draft budget, although gains were expected to be capped by uncertainty over when the country may ask for a bailout.
Analysts said a European Union annual farm subsidy to the UK, expected to be transferred later in the session, would also limit euro strength versus the pound. The subsidy could see around 3 billion euros ($3.85 billion) of flows into Britain.
The euro rose 0.2 percent to 79.64 pence, moving away from a three-week low of 79.23 pence hit on Thursday.
With no UK data scheduled for Friday market players said moves in sterling would be driven by events in the euro zone and broader investor appetite to take on risk.
“For today the market is giving Spain the benefit of the doubt. The backdrop is slightly supportive for risk,” said Chris Turner, head of FX strategy at ING.
Spain unveiled a 2013 budget based on spending cuts that many saw as an effort to pre-empt the likely conditions of an international bailout.
Many market players said a Spanish bailout request would be seen as a positive for the euro and other perceived riskier currencies, as it would allow the European Central Bank to start buying the country’s bonds and lower borrowing costs.
Investors were also looking ahead to the results of an audit on the recapitalisation needs of Spanish banks, that could knock the euro if banks’ funding needs are much bigger than anticipated.
Citi analysts said the EU farm subsidy payment was likely to have been priced into euro/sterling, meaning there was limited scope for the pound to push significantly higher.
“We suspect that euro/sterling downside maybe less pronounced in the very near term especially given that the market has moved in anticipation of more euro/sterling weakness ahead,” they said in a note.
A slight improvement in recent UK data helped support sterling, after second quarter UK gross domestic product was revised higher on Thursday to show 0.4 percent contraction, up from an original estimate of 0.7 percent contraction.
Investors will focus on UK PMI surveys next week to gauge the likelihood of the economy emerging from recession.
“The UK economic outlook has been picking up very mildly and sterling looks the best of a bad bunch among the G4 currencies,” said ING’s Turner.
Sterling rose 0.1 percent against the dollar to $1.6241 but held below last week’s 13-month high of $1.6310.
Technical strategists said a break above that level could see sterling rally towards $1.65, near the top end of the range roughly between $1.52 and $1.66 that it has traded in since mid-2011.
The sterling trade-weighted index was steady at 84.7. A move above there would out the index at its strongest level in nearly four years.