LONDON (Reuters) - Sterling fell to a five-week low against a broadly firmer euro on Friday after approval of the latest bailout deal by German lawmakers, while concerns about the UK economy left it vulnerable.
The euro rose 0.4 percent against sterling, hitting a five-week high of 81.325 pence. Traders said it was helped by month-end demand for euros from corporates and some European central banks.
Further gains could see the euro target October’s high of 81.65 pence.
“It is very much a euro story that is driving euro/sterling higher,” said Arne Lohmann-Rasmussen, head of FX research at Danske Bank.
“We see a continuous tightening of peripheral spreads for Italy and Spain over the last week, and the political will with respect to Greece has limited the downside for the euro”.
The euro has gained as a deal to release aid funds to Greece was agreed earlier this week, causing borrowing costs for other indebted countries like Spain and Italy to fall.
German lawmakers on Friday approved the bailout deal by a large majority, helping the euro’s cause.
Against the dollar, the pound was down 0.1 percent at $1.6018 (9994 pence), slipping well below an earlier one-month high of $1.6062 (1.0022 pounds).
Traders said events next week had the potential to help sterling break the recent range of $1.5880-$1.6050.
Bank of England and European Central Bank policy meetings next week could provide direction for the pound, while the UK’s half-year budget statement could provide clarity on the UK’s fiscal position.
Bleak economic data has boosted the argument for monetary easing by the BoE, or quantitative easing (QE), and this is likely to cap any rallies in sterling against the dollar. QE is seen as negative for the pound as it increases its supply.
BoE Governor Mervyn King on Thursday flagged an “exceptionally challenging” environment in the UK economy, a factor likely to boost the case for a weaker pound to stimulate growth.
But strategists said concerns about the euro zone growth and economic reforms may also curb the gains for the euro.
Tom Levinson, currency strategist at ING said euro/sterling could move towards 81.60 pence but he warned any re-emergence of euro zone debt worries could see investors resume buying sterling as an alternative to the euro.
Editing by Ron Askew