Sterling fell to a 7-1/2 month low against the euro in thin trading on Monday, as lingering doubts over a UK recovery kept alive the possibility of more monetary easing in the New Year. The British pound also underperformed the euro versus the dollar. While the euro rose broadly as concern about peripheral euro zone countries waned, concerns that the Bank of England may opt for more stimulus in the near term kept sterling bulls at bay.

Against the euro, sterling fell to its lowest since early May. The single currency was up 0.2 percent at 81.73 pence with near term resistance at around 81.985 pence, the May 1 high. The pound's losses against the euro pulled down sterling's trade weighted index to a 10-day low of 83.5, data from the BoE showed. "We would expect sterling to underperform the euro in the medium-term, with a two-three month target at 82.66 pence - the 38.2 percent retracement of the July 2011-July 2012 sell-off," BMO Capital said in a note.

The euro fell from a high of 90.84 pence in early July 2011 to a low of 77.56 pence in July 2012. Sterling was flat at $1.6180, having earlier risen past $1.6200 helped by buying by semi-sovereign investors in early London trade. Traders said option expiries at $1.6200 are likely to keep gains in check and well below its three-month high of $1.6307 hit last Wednesday. Traders said sterling has come under pressure in recent sessions on steady demand from German banks for the single currency, possibly to meet month-end euro requirements.

Copyright Reuters, 2012