LONDON Sterling fell against the euro on Thursday after weaker UK lending data added to expectations for more quantitative easing, which would likely keep the British currency under pressure.
Market players cited some buying of the euro and selling of sterling by central banks for month-end requirements. Traders said sentiment towards the pound was also soured by speculation that rating agencies could cut Britain's triple-A credit rating early next year.
The euro gained 0.1 percent to 80.91 pence, edging back towards a one-month high of 81.145 pence hit on Monday. The pound was up 0.2 percent against the dollar at $1.6036.
UK bank lending to the real economy fell at its sharpest pace in more than two years while broad money supply grew slightly in Britain in October, data showed.
"The lending data are still very weak, meaning further policy measures from the Bank of England are still very much on the table," said Jane Foley, senior currency analyst at Rabobank.
Foley said the increased chance of QE in the UK was likely to cap any rallies in sterling against the dollar, while swings in market sentiment over the U.S. budget deadlock would also dictate the pound's moves in the near term.
QE is seen as negative for the pound as it increases supply of the currency.
Geoff Kendrick, currency analyst at Nomura, pointed to next week's mid-year budget update as a potential risk factor for sterling.
"While the underlying data are likely to show some fiscal slippage, the headline numbers should be enough to keep any ratings concerns at bay for now."
European data showed economic morale in the euro zone improved for the first time in almost a year in November, but industry's reluctance to invest next year bode poorly for a quick recovery from recession. That is likely to check gains by the single currency, traders said.
Bank of England Governor Mervyn King, in the bank's Financial Stability Report, flagged an "exceptionally challenging" environment in the UK economy, a factor likely to boost the case for a weaker pound to stimulate spending.
He also said significant adjustments needed to be made in the euro zone, Britain's biggest trading partner.
"The MPC remains pretty dovish in its language, so there is no reason for euro/sterling to go down between now and early into next year," said Kit Juckes, currency strategist at Societe Generale.
"At the moment euro/sterling is following euro/dollar, but there is no independently positive story for the UK at this time," Juckes added.
British retail sales in November rose at the fastest pace since June, a survey from the Confederation of British Industry showed, but prompted little optimism as overall consumer demand remained sluggish.
(Editing by Susan Fenton)