Pound gains vs euro on euro zone debt concerns

Sterling rose to a near 9-month high against a broadly weaker euro on Wednesday as the single currency was hit by concerns that euro zone debt problems will spread beyond Greece.

Investors sold the euro on fears of contagion that deepened even after Greece sealed an agreement at the weekend for an unprecedented aid package from its European partners and the International Monetary Fund.

"The announcement of the Greek package has failed to break the negative momentum in asset markets and it is unclear what can stabilise sentiment," said Adarsh Sinha, currency strategist at Barclays Capital.

By 10:08 a.m., the euro fell 0.1 percent to 85.62 pence, after hitting a near a 9-month low of 85.45 pence earlier.

Technical analysts say a break below the 86.03 low in late January opens the door for a decline to the June 2009 low of 84.00 pence.

Sterling's gains against the euro helped push it up on a trade-weighted basis to 80.0 by mid-morning trade, just shy of a near two-month high of 80.1 hit last week.

But the pound remained pressured against the dollar on broader risk aversion, after it slipped to a 5-week low the previous day. It was last flat on the day at $1.5141.

The pound moved in tandem with the euro which hit a 1-year low of $1.2936 on deepening contagion fears.

Sterling sentiment was also weighed down by uncertainty ahead of what promises to be a closely contested UK general election on Thursday.

Latest opinion polls show a slight rally for the ruling Labour Party, but no one party was seen gaining a clear majority in parliament.

"It would take a sizeable Conservative Party victory to foster a break-out to the topside, whereas a more muddled outcome of a hung parliament and lingering uncertainty over the weekend would likely provoke a knee-jerk reaction in the opposite direction," said Daragh Maher, deputy head of FX strategy at Credit Agricole CIB.

Data on Wednesday showed the purchasing managers' index for the UK construction sector accelerated at its fastest pace since September 2007 last month, helped by rising new orders.

A separate survey showed British shop price inflation accelerated sharply in April, driven by commodity prices rises, the reversal of a cut in value-added tax and a weak pound.