LONDON Sterling rose to a one-month high against the euro on Wednesday after the single currency responded to mounting concerns over the currency bloc's economic prospects.
The euro fell to 79.785 pence, its lowest level since Oct 1, after weaker-than-expected German industrial output data and lowered growth forecasts from the EU Commission.
The euro was also hurt by comments from ECB President Mario Draghi who said the bank expected the euro zone economy to remain weak "in the near term," adding to investor nervousness ahead of the central bank's policy meeting on Thursday.
The single currency was last trading at 79.78 pence, down 0.4 percent against the pound and close to its trough of 79.71 pence. Near-term support for the euro was seen at 79.65 pence, its 100-day moving average.
The euro faced further pressure before a Greek parliamentary vote later on Wednesday on austerity measures necessary to secure the next tranche of bailout cash and avoid bankruptcy.
"A positive vote from Greece will probably not put a lot of upward pressure on euro/sterling as the market has likely already priced in for the voting in Greece to go OK," said Adam Cole, head of global FX strategy at RBC.
"But a negative vote will see an absolutely plunge (in euro/sterling)."
Earlier on Wednesday, sterling gained against the dollar after investors sold the U.S. currency as victory for Barack Obama in the U.S. presidential election was seen ensuring easy monetary policy.
But the dollar soon rose to a two-month high against major currencies as investors shifted focus to the looming U.S. fiscal cliff concerns, bolstering the safe-haven appeal of the U.S. currency. The fiscal cliff is a mix of tax increases and spending cuts due to extract some $600 billion from the economy starting January1, barring a deal with Congress
QUESTIONS ON QE
Nerves ahead of a Bank of England interest rate decision on Thursday also kept investors wary of the British pound.
Sterling was down 0.1 percent on the day at $1.5978, easing towards its two-week low of $1.5957 struck on Monday, and off a session high of $1.6043. Near-term support is seen at October 23 low of $1.5914.
Robust UK gross domestic product figures in the third quarter and comments by the Bank's policymakers have prompted market players to lower their bets on further easing from the BoE's monetary policy committee (MPC) on Thursday, a factor that has helped the pound in recent weeks.
A slew of weaker-than-expected industrial, housing and retail sales data has dented hopes of a sustained recovery in the fourth quarter but was not enough to shake the belief the Bank will hold off pumping in more cash until early next year.
Expectations of more quantitative easing (QE) usually weigh on sterling as asset purchases increases the currency's supply.
"There seems to be quite a large risk that we get no more QE from the Bank tomorrow. Even if we do the risk is they signal very strongly this will be the last QE in the absence of a large shock," Cole said.
He added that either way the market will take that as being a relatively positive signal for the currency.
Economists polled by Reuters expect rates to be held and asset purchases to pause at 375 billion pounds, expecting the central bank to hold fire until early next year.
The European Central Bank also meets on Thursday and while no rate cuts are expected, growing evidence that the euro zone is in recession is likely to boost expectations of more easing in the coming months.
BMO Capital Markets recommended investors go short on the euro against the British pound before the rate decisions by the ECB and the Bank.
"We have entered a short EUR/GBP position at 79.87 pence. We set a stop loss at 80.80 with near-term targets at 79.155 and 78.54 (61.8 percent and 76.4 percent retracements of the July-October rally)."
(Additional reporting by Philip Baillie; editing by Keiron Henderson)