[LONDON] Sterling hit a six-year high against a struggling euro on Thursday on growing expectations the European Central Bank will embark soon on outright government bond buying.
Traders said the pound was also still drawing support from expectations that the British economy would outperform its peers in Europe.
With inflation subdued and growth slowing, investors have pushed back when they expect the Bank of England to raise interest rates. But the UK's prospects still contrast with the threat of deflation facing the eurozone.
The euro was down 0.1 per cent at 77.30 pence, having dropped to 77.25 pence, its lowest level since late 2008. The single currency has lost 3.5 per cent in the past three months and chartists say it on the verge of dropping to lows of 74.50 pence - a level last visited in early 2008.
"Short euro/sterling looks a good avenue to be exposed to ECB QE and any re-assessment of Bank of England tightening prospects," said Chris Turner, head of currency strategy at ING.
"Look to sell a euro rally to 77.45/65 pence." The euro weakened on Wednesday after an adviser to the European Court of Justice said an ECB bond-buying programme was legal under certain conditions. That was seen as paving the way for quantitative easing to be announced, perhaps as early as Jan 22, when the ECB governing council meets.
Despite gains against the euro, sterling lagged the dollar. Sterling was down 0.2 per cent at US$1.5209.
Investors are wary of adding bets on the pound, especially against the dollar, before a general election in May. The election is likely to be the most uncertain in modern times and may lead to another fractious coalition government - and to a referendum on Britain's membership of the European Union.
"Sterling remains a sell on any rallies in our view as political issues move into focus by spring," said Jonathan Webb, head of FX strategy at Jefferies in a note. "Cracks in economic data would be a bonus to our bearish sterling view."