January 10, 2012 / 9:36 AM / in 6 years

Debt worries keep pound near 16-mth high vs euro

4 Min Read

* Sterling hovers near 16-mth high vs struggling euro

* Cable slightly lower, tracks weakness in euro/dollar

* Analysts: Cable fall to $1.50 possible in coming months

LONDON, Jan 10 (Reuters) - Sterling hovered near a 16-month high versus the euro on Tuesday as the absence of a major breakthrough on the euro zone debt crisis in Franco-German talks the previous day kept investors negative towards the single currency.

Despite being supported against the euro, the pound was on the backfoot against the dollar, tracking a slight move lower in the euro as investors continue to gravitate towards the U.S. currency, the world's most liquid, during times of uncertainty.

After talks on Monday between Germany and France failed to produce an immediate solution to contain the effects of the region's debt problems, analysts saw further selling risks to the euro, which would continue to drive movements in the pound.

"Sterling is following a broader move in euro/dollar, so euro/sterling has fallen like a stone, and Cable is falling as well," said Peter Kinsella, currency strategist at Commerzbank.

"We still see more downside in euro/sterling, and it will probably be the same story in Cable," he said, adding that a fall in Cable to around $1.50 was possible in the coming months.

In London trade, the euro slipped 0.1 percent on the day to a session low of 82.49 pence, hovering near 82.22 pence hit on Monday, its weakest since September 2010.

Sterling slipped slightly on the day to a session low of $1.5447, but the pound avoided a further slide as its 55-hourly moving average at that level provided technical support on an intraday basis.

In the longer term, however, technical analysts believe any gains in the pound will be limited by technical resistance around $1.5700, its 55-moving day average, and around $1.5750, where a downward trendline drawn from highs hit in August and November lies.

Market participants said intermittant corporate demand for euro/sterling was limiting a further downside in the pair.

Traders added they had seen bids for euro/dollar and euro/sterling since the start of the week, following a quiet first week of 2012.

"Cable's rally off the lows at the moment seem to be tempered by exporter demand for (cross/sterling) on any dips," said a trader in London, while adding that the pound was supported by bids suspected around $1.5420/40.

Its upside was capped by offers at $1.5510/25, he added.

The main event of the week for sterling investors is likely to be the BoE rate decision on Thursday. Policymakers are expected to keep rates on hold at 0.5 percent and maintain the quantitative easing target at 275 billion pounds.

Some analysts see the possibility that the UK central bank may raise its asset-buying programme in the coming months if the economy continues to struggle.

Still, market participants believe the pound will be supported against the euro as investors flock to UK assets, which are considered a safer alternative to euro zone assets given that Britain is seen maintaining its AAA credit rating.

Gilt yields have hovered around record lows as a result, even as the UK economy hobbles towards recovery, and risks the chance of falling into recession this year.

Analysts say the recent outperformance of the UK gilt market was more a result of concerns about the euro zone than confidence in UK economic fundamentals.

Data released Tuesday on UK housing showed prices fell at a marginally slower pace in the three months to December, while respondents expected prices to continue falling.

Other data showed a jump in UK retail sales growth in December, but retailers expect another tough year in 2012. (Reporting by Naomi Tajitsu; editing by Anna Willard)

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