Sterling eased from a 16-month high versus the euro on Wednesday and held steady against dollar, with the euro zone's debt crisis expected to keep the pound buoyed against the single currency as investors look for safer areas to allocate funds. The pound hit highest levels since September 2010 on Monday against the euro of 82.22 pence and was trading slightly weaker around 82.58, but analysts said the outlook remained favourable for sterling, in spite of a fragile outlook for the UK economy. "Sterling is possibly the strongest of the European currencies as it is perceived as a safe haven. The UK government's fiscal plan is viewed as far more credible and gilts' safe haven status suggests sterling will benefit to some extent," said Raghav Subbarao, currency strategist at Barclays Capital, whose 12-month forecast for euro/sterling is 80 pence. British government bond yields have slumped to record lows in recent months, as prices surged on the back of a second round of quantitative easing asset purchases from the Bank of England and safe-haven flows from investors worried about the euro zone. The euro was broadly steady on Wednesday ahead of key tests of investors sentiment surrounding Spanish and Italian debt sales and the European Central Bank's monetary policy decision later in the week, with sovereign funding worries expected to keep the single currency under pressure. "Over the medium term we continue to think that EUR-GBP should move lower and we view the August 2010 low of 81.47 as an initial take profit level for short EUR-GBP positions," said analysts at Commerzbank in a note. Traders reported stop-losses around 82.90 which they said could be hit if short euro positions were squeezed, but offers were then highlighted at 83.10/30. Sterling was trading roughly flat for the day versus the dollar at $1.5465. Traders said the pound was likely to stay hemmed within recent ranges while above trendline support from the October low, coming in at $1.5375, with further support at the December low of $1.5361. Focus will switch back to the UK on Thursday when the Bank of England announces its latest decision on monetary policy but no changes in interest rates from record lows is expected and any increase in its asset purchase programme is more likely in February. The UK trade balance for November is due for release at 0930 GMT, with economists in a Reuters poll looking for the deficit to widen to 8.3 billion pounds. Data released overnight showed British shop prices grew at their slowest pace in 16 months in December as retailers slashed prices for electrical goods, clothes and footwear in the run-up to Christmas.

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