LONDON Sterling fell to a one-month low against a firmer euro and a trade-weighted basket of currencies on Friday as international lenders inched towards an aid deal for Greece.
The euro rose to 81.085 pence, its highest since October 24, staying just shy of chart resistance at 81.09 pence, the 233-day moving average. It was last up 0.1 percent on the day to 80.91 pence.
Falls against the euro pushed the pound's trade-weighted index to a one-month low of 83.3, Bank of England data showed. The euro makes up around 50 percent of the index.
"There could be a bit more scope for upside in euro/sterling. Once there is a clear path of action for Greece we could see it rally," said Richard Wiltshire, chief FX broker at ETX Capital.
More gains would see the euro target the October peak of 81.65 pence, although charts show this could be a tough hurdle to breach because the level coincides with the 55-week moving average.
There were signs on Friday that lenders were inching toward a compromise on the key issue of how to cut Greece's debt pile further than previous estimates.
The euro also gained after the Ifo German business climate index unexpectedly rose to 101.4 in November, above forecasts for 99.5.
But traders and analysts were wary of forecasting the single currency would rise much higher because other data recently has pointed to a deepening euro zone slowdown.
"There are plenty of other reasons out there for downward pressure on the euro and it is not going to soar," said Simon Derrick, head of currency research at Bank of New York Mellon, adding it was unlikely to continue rising up to 84 or 85 pence.
Buoyed by the euro's gains against the dollar, however, the pound rose 0.6 percent on the day to hit a two-week high of $1.6035.
With Bank of England policymakers looking likely to hold fire on more quantitative easing until next year, traders said sterling's movements were being driven largely by developments elsewhere.
"Sterling is a bit-part player. It's been in the shadows of the euro and the dollar for the last month or six weeks easily and people don't have strong views on it at the moment," ETX's Wiltshire said.
"The Bank is in a wait-and-see mode so sterling is a wait and see too."
The Bank left policy unchanged at its November meeting. Minutes earlier this week revealed only one out of nine policymakers voted for an increase in quantitative easing. QE typically weighs on a currency because it increases the supply.
But concerns about a weak economy will keep alive the possibility of further easing, which may hamper the pound.
Bank policymaker Spencer Dale told Friday's Yorkshire Post that the UK economy was broadly "flat". He added that discussion among policymakers was "intense" at the moment because no one could be sure of the course needed to hit the Bank's inflation target.
Another policymaker David Miles said he would have backed a much bigger increase in monetary stimulus if the government had not announced plans to take a cash surplus of 35 billion pounds from the central bank.
"I'm not sure MPC members talking today has really got us anywhere much further on knowing what the Bank will do," said Steve Barrow, head of G10 currency at Standard Bank.
(Additional reporting by Philip Baillie, editing by Jason Webb)