* Sterling recovers from 2-1/2 year low versus dollar
* Gains versus weaker euro on weak demand for Italy debt
* Pound looks oversold for now, but any gains seen limited
* Worries about prospect of UK recession, more QE remain
By Jessica Mortimer
LONDON, March 13 (Reuters) - Sterling recovered from a 2-1/2
year low against the dollar on Wednesday and gained against a
weaker euro as some investors believed its recent steep falls
may have gone too far for now.
A feeble UK economy was expected to leave it vulnerable to
further falls, however.
The euro was down 0.7 percent at 86.85 pence, off
a more than two-week high of 87.93 pence hit on Tuesday and
pressured after an Italian sale of government debt drew weaker
demand, causing Italian borrowing costs to rise.
Analysts said the pound's gains were also the result of
investors who had sold it at higher levels seeing an opportunity
to take profit, particularly given a lack of UK data for the
rest of this week.
"When any currency falls too fast too quickly there is
always going to be a correction. But fundamentals still point
towards further sterling weakness," said Nawaz Ali, market
analyst at Western Union Business Solutions.
The pound was up 0.3 percent against the dollar at
$1.4955, off a low of $1.4832 hit on Tuesday after data showed
UK manufacturing output contracted sharply in January.
But its gains were tempered after
better-than-expected U.S. retail sales data lifted the dollar.
Analysts said the pound could recover further in the coming
days, with sterling/dollar's relative strength index, a chart
indicator, suggesting the UK currency is oversold.
Sterling has been one of the worst performing currencies of
2013 and has lost more than 8 percent against the dollar and
around 7 percent against the euro so far.
But any gains were expected to be limited. Tuesday's weak UK
data raised the prospect of the economy slipping into another
recession and increased the chances of the Bank of England
extending bond purchases under its quantitative easing
Central bank asset purchases increase the supply of a
currency and drive down its value.
"There are signs of sterling looking a little oversold and
this brings the potential for a recovery towards $1.50 or $1.51.
But the bigger picture is for it to move lower," said Simon
Smith, chief economist at FXPro.
He said any short-covering rally in the pound may be
curtailed when UK finance minister George Osborne presents his
budget on March 20.
Traders speculate that Osborne will announce a review of the
BoE's remit and give it more leeway on inflation targeting,
allowing scope for a further easing of monetary policy.
Analysts at Lloyds said in a note that the pound was
"vulnerable to the downside on bad UK data/news". However, a
lack of major UK data in the coming days should keep it above
support at $1.4823 and 88 pence per euro for now.
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