LONDON Sterling eased against the dollar on Friday, moving within sight of a two-month low and looking set for further losses on speculation about more monetary easing by the Bank of England.
The pound was lower on the day at $1.5840, having hit a two-month low of $1.5828 on Thursday when a sharp slide in October retail sales stoked pessimism about the UK economy. Traders cited bids from Asian central banks at $1.5830 which would check losses, for now.
For the week it has lost 0.4 percent and was on track for its third straight week of losses. Sterling has come under more pressure after Governor Mervyn King this week flagged his unease about the exchange rate when unveiling a gloomy Bank inflation report on Wednesday.
"The market is getting nervous now of complaints about sterling's strength from the Bank," said John Hardy, currency strategist at Saxo Bank, adding that would weigh on the pound.
Hardy said he expected the Bank to restart its asset purchase programme to help stimulate growth, although it may not make such a move in the near term.
Some analysts expect monetary policymakers may hold fire in coming months after the inflation forecast was revised higher. But UK growth looks likely to be weak, with the economy expected to expand only slightly more than 1 percent next year.
The minutes from the Bank of England's latest monetary policy committee meeting will be released next week and could give some clues on whether more easing is on the cards.
Trade-weighted sterling rose to 83.7, having hit a three-week low of 83.4 on Thursday. It is up 3.3 percent this year, despite the UK being in recession in the first half of the year. That is mainly because of sterling's strength against the vulnerable euro.
EURO ZONE CONCERNS
The euro fell 0.5 percent against the pound to 80.15 pence, pulling away from the previous day's two-week high of 80.65 pence. Market players cited demand for sterling from a UK bank earlier in the session.
Saxo's Hardy said the euro could target its November 8 low of 79.605 pence, given concerns about the euro zone sliding into recession and uncertainty about financial aid to Greece.
A row over how to make Greece's debts sustainable is holding up payment of its next aid tranche, a factor that is likely to weigh on the euro in the near term, analysts say.
"We have seen some euro strength this week but it is definitely as fragile as last week, and the data indicating a euro zone recession has definitely opened up the downside for the euro," said Nawaz Ali, UK Market analyst at Western Union Business Solutions.
He added that the euro's short-term outlook would be focused on negotiations for a bailout deal for Greece.
"We would expect sterling to recover and euro/sterling to head back towards 80 pence," he said.
Other analysts said sterling's gains could be limited against the dollar given the UK's weak economic outlook.
"The public and household sectors continue to deleverage, and productivity remains low - making the UK a less-than-favourable destination for investment. This does not bode well for sterling," said Morgan Stanley strategists in a note.
(Editing by Ruth Pitchford)