The ruling paves the way for the European Stability Mechanism (ESM) to be used to tackle the euro zone debt crisis and sent currencies perceived as riskier rallying across the board. The pound rose against the dollar after the ruling, though it fell to a two-month low of 80.28 pence against a broadly stronger euro. Demand for sterling versus the dollar was also fanned by bets the US Federal Reserve may announce another round of monetary easing after its two-day policy meeting ends on Thursday. Strategists said the pound could rally further versus the dollar if the Fed does relaunch its bond-buying programme, which tends to weigh on the dollar, but sterling was also vulnerable to the risk policymakers will hold fire. "We've had better news out of the euro area on the one hand and on the other hand people are pricing in more QE from the Fed tomorrow and both of those have pushed cable (sterling/dollar) higher," said Raghav Subbarao, FX strategist at Barclays. "Our base case is that they will do QE but the market has priced in that probability quite aggressively given the uncertainties." Sterling climbed around 0.4 per cent on the day to a high of $1.6132, breaking through resistance at $1.61. It was last up 0.1 per cent at $1.6085. The pound is nearing the top end of its year-long trading range roughly between $1.52 and $1.63, and many analysts said further gains could be a struggle. Speculation that the Fed will announce more monetary easing this week was heightened after a weak US jobs reading on Friday that fuelled concerns about slowing economic growth. A warning from Moody's ratings agency on Tuesday that the United States could have its credit rating cut unless it reduces its heavy debt burden also weighed broadly on the dollar. Better UK data Sterling was helped by better-than-expected UK employment figures, although analysts said domestic data would be of secondary importance to investors this week. The number of British people claiming unemployment benefit unexpectedly fell in August, raising hopes of an improvement in the labour market. UK economic data, including recent PMI surveys, have been stronger than expected, suggesting the economy may be emerging from recession. But many analysts said with top UK trading partner the euro zone also in recession, the growth outlook for the economy was still uncertain. As a result the Bank of England was likely to keep monetary loose for some time, limiting the pound's gains. "Sterling is currently enjoying some positive support from events in Europe," said Ian Stannard, head of European FX strategy at Morgan Stanley. "But as far as UK fundamentals are concerned, although we have seen some better data, I think the bigger concern is that the overall growth outlook is being called into question."

Source