LONDON Sterling was steady in thin trading on Monday, with lingering doubts over a UK recovery likely to keep alive the chances of more monetary easing in the New Year that would limit any gains for the pound.
Uncertainty over the U.S. budget talks was also likely to support inflows into the more liquid U.S. dollar in the near term, traders said.
The White House on Friday tried to rescue the stalled talks after an alternative Republican plan imploded in Congress. But little headway was made as lawmakers and President Barack Obama left Washington for Christmas.
Obama and Republican House of Representatives Speaker John Boehner, the two key negotiators, are out of town for the holidays, and Congress is in recess and will have only a few days left to act before January 1.
Sterling was steady at $1.6190 helped slightly by buying by semi-sovereign investors in early London trade with stop-loss buy orders cited above $1.6200. Traders said option expiries at $1.6200 are likely to keep gains in check and well below its three-month high of $1.6307 hit last Wednesday.
"I can't see any reason for anything to happen to break ranges today. The market, I think, will play in the $1.6150 - 1.6200 range," said a London-based spot trader.
"There are some stops reported above $1.6200 so might have a go but not sure if the market has the inclination or the impetus."
Against the euro, sterling was slightly lower at 81.58 pence per euro, not far from its recent 7-1/2 month low of 81.68. Traders said sterling has come under pressure in recent sessions on steady demand from German banks for the single currency, possibly to meet month-end euro requirements.
A slew of weak UK data has weighed down on the pound since late last week. Weaker-than-expected retail sales, a rise in public borrowing and a sharp fall in December consumer confidence figures have all added to concerns that the economy's performance could deteriorate in coming months.
Some analysts said there could be more weakness in sterling next year if the UK economy continues to struggle, prompting the Bank of England to ease monetary policy further.
In contrast, worries about the euro zone debt crisis have waned and the European Central Bank's offer to buy bonds of struggling peripheral euro zone countries was likely to provide a short term boost to the single currency.
"We would expect sterling to underperform the euro in the medium-term, with a two-three month target at 82.66 pence - the 38.2 percent retracement of the July 2011-July 2012 sell-off," BMO Capital said in a note.
"Looking further into 2013, we believe that sterling bulls badly need more positive UK macro news to return at some point soon."
(Reporting by Anirban Nag; Editing by Hugh Lawson)