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LONDON (Reuters) - Sterling hit a one-month low against the euro on Thursday on optimism that the euro zone will reach a deal to help debt-laden Greece, while concern about the UK economy checked its gains versus the dollar.
The euro hit a peak of 80.86 pence, its highest since October 25. It was last up 0.4 percent on the day at 80.72 pence. Technical support came in at 80.37 pence, the 55-day moving average.
Expectations that a euro zone agreement to release funds to Greece would be finalised soon provided a broad lift to the single currency, which also climbed against the dollar and yen.
"I think the euro/sterling going up reflects a better performance from the euro as people are increasingly more confident that a deal gets done around Greece," said Paul Robson, senior FX strategist at RBS.
The euro was supported by comments from European Economic and Monetary Affairs Commissioner Olli Rehn that Greece had taken all necessary steps to secure its next tranche of aid and euro zone finance ministers should be able to sign off definitively on a deal next Monday.
Euro zone data released earlier in the session also showed manufacturing activity contracted less than expected, giving the shared currency another support.
Although the manufacturing data soothed some concerns about a deep contraction in the euro zone, the region is already in recession and tough reforms are expected to dent growth.
That will hurt economic prospects in the UK as the currency bloc is the country's biggest trading partner.
Recent UK data has suggested the economy may struggle to sustain growth in the current quarter, keeping alive chances of further easing by the Bank of England and limiting demand for the pound.
The CBI monthly industrial trends survey on Thursday showed British factory orders were lower than expected this month, with business confidence in the UK undermined by uncertainty in the United States and Europe.
Comments from BoE policymaker Martin Weale that there was a significant risk of contraction in the UK in the fourth quarter also weighed on sterling.
Sterling pared gains to fall to $1.5931, down 0.1 percent on the day, from a two-week high of $1.5978 hit earlier in the session.
With no UK data scheduled for Friday strategists were already looking ahead to the second reading of UK third quarter GDP data, due on Tuesday. Any downward revision to the initial estimate of 1 percent growth could undermine the pound.
"A big downward revision could see a big sell-off in sterling. Sentiment towards the UK is pretty shaky and it would not take much to make it take a downturn," said Christian Lawrence, currency strategist at Rabobank.
Additional reporting by Nia Williams