LONDON Sterling recovered from recent multi-month lows against the dollar and euro on Thursday, but was still expected to succumb to further losses on growing concerns about the UK economy.
Sterling was up 0.3 percent on the day against the dollar at $1.5852, having hit a one-week high of $1.5860, as investors took profit after its recent falls.
However, it faced stiff chart resistance at its 200-week moving average of $1.5856. A failure to sustain gains above this level could cause it to re-test the five-month low of $1.5674 hit on Monday.
Focus will centre on UK manufacturing PMI data for January on Friday and a weak number could weigh on sterling if it suggests the economy may have started the year badly.
The pound has already lost nearly 3 percent against the dollar this year, having been knocked after data last week showed the economy shrank in the last three months of 2012.
"We worry about structurally weak growth of the UK and we see sterling falling further," said Paul Robson, currency strategist at RBS, who forecasts sterling to weaken to $1.53 by mid-2013.
Worries the UK could tip back into recession this year have fuelled speculation the Bank of England may opt for looser monetary policy in coming months, while ebbing euro zone tensions have undermined sterling's status as a safe-haven alternative to the single currency.
Strategists said while the pace of the pound's losses may slow, further falls were likely.
"Medium term, we think sterling will weaken against the dollar although it has moved very aggressively in the past few weeks," said Raghav Subbarao, FX strategist at Barclays.
"The UK economy is in a far worse shape than the U.S. economy."
The Bank policymaker Martin Weale said in an interview on Wednesday that he remained open to the possibility of more easing under the right conditions.
Analysts said a manufacturing PMI number on Friday below the 50 level that divides expansion in the sector from contraction could reinforce concerns about the economy and prompt fresh sterling selling.
Data showing UK house prices rose more than expected in January helped to spur some sterling buying in early London trade, but analysts said gains were muted by the broader worries about the UK economy.
The euro was down 0.2 percent on the day against sterling at 85.71 pence. However, it was still not far from Wednesday's peak of 86.065, its highest since December 2011.
The single currency has gained broadly in recent weeks on increasing optimism that the worst of the sovereign debt crisis is over, prompting investors who bought the pound last year as a safe haven from the euro zone to reverse those flows.
However, some traders and analysts warned the euro had possibly risen too high, too fast and could slowly start paring some of those gains versus sterling.
"Euro/sterling is close to exhausting its New Year rally and an initial pull-back to 83 pence (over the next couple of weeks) seems likely, so short euro/sterling here offers decent risk reward," RBS's Robson said.
"We wonder whether the market has priced in too much good news around the euro area and whether financial conditions improving will lead to an improvement in the real economy."
(Additional reporting by Nia Williams; editing by Stephen Nisbet)