LONDON Sterling fell to its lowest in more than a week against the euro on Friday after Standard & Poor's lowered its outlook on UK government debt to negative, putting the UK's prized triple-A rating at risk.
The euro rose 0.2 percent to 81.395 pence, its highest since December 5. Further gains could see it target the high reached on that day of 81.47 pence.
S&P said late on Thursday it saw a one-in-three chance that Britain will be downgraded in the next two years.
Analysts said the pound's losses were limited as S&P's outlook was in line with that of fellow ratings agencies Fitch and Moody's. But any evidence of UK economic weakness in coming weeks could reignite concerns about the prospect of a downgrade.
"Market sentiment (towards sterling) remains relatively heavy after S&P changed the UK's outlook to negative," said Garen Ovsepyan, managing member at currency hedge fund SHARPE + SIGNA, which has assets under management of $80 million (49 million pounds).
The pound was up 0.2 percent at $1.6144 (1.0004 pounds) against the dollar, though it was well below a six-week high of $1.6173 (1.0022 pounds) hit on Wednesday. It was expected to struggle to rise much above their given chart resistance at $1.6176 (1.0024 pounds) and $1.6178, highs hit on November 1 and October 17.
"Our weekly cyclical model indicates a structural weakness in cable (sterling/dollar) ... It has rejected the $1.6180 level now three times since 17th October, which points to a bleak outlook at least for the coming week," said Ovsepyan.
Falls against the euro pushed the pound to a nine-day low against a basket of currencies, with its trade-weighted index dropping to 83.5.
But unless the risk of a UK downgrade is seen as increasing, or if the Bank of England looks likely to opt for more monetary easing, analysts and traders said the pound would continue to be driven mostly by developments in the dollar and the euro.
"Sterling has not been moving on its own steam for a while. We await further UK data ... The Bank of England will probably sit on the fence until data forces them to act," said Richard Wiltshire, chief FX broker at ETX Capital.
The dollar has come under pressure in recent sessions both against the pound and the euro after the Federal Reserve increased its asset purchase scheme on Wednesday, with investors also fretting over looming U.S. budget problems.
Some analysts said S&P's negative outlook could raise questions over Britain's status as a safe-haven from the euro zone's troubles.
BMO currency analyst Audrey Childe-Freeman said there was a risk of the UK receiving a downgrade in the coming months but underlined that such fears were not isolated to the UK, with France, the U.S. and Japan all facing similar threats.
She added that a broadly improved flow of news on the euro zone - where officials this week agreed the outline for a banking union and approved new loans for Greece - was weakening the UK's safe-haven perception.
But analysts at Citi said there was still healthy appetite for gilts in preference to riskier euro zone sovereign bonds and that meant falls for sterling were unlikely to deepen badly.
"We doubt that this could grow into a sustained sterling negative," they said in a note, adding that demand for UK gilts was likely to remain high as an alternative to euro zone peripheral bonds and thus support sterling.
(Additional reporting by Philip Baillie; Editing by Hugh Lawson)
Our top photos from the last 24 hours.