The euro was last down 0.4 percent on the day at 81.90 pence, having earlier risen to 82.25 pence, its highest since mid-April. Traders saw near-term resistance at 82.43, the high reached on April 18, and a sustained break above that level could see the euro reach 82.765 pence, the high hit on April 10.
"There seems a bit of a euro selloff as we approach year end," said a London-based spot trader. "Below 81.70 pence, a few positions may be squeezed, but a sustained move down is unlikely." The pound's drop against the euro helped push its trade-weighted index to a two-month low of 83.1, and analysts expect sterling to underperform against the euro in coming weeks.
"Sterling will struggle against the euro as a UK recovery will be uneven and inflation will be high next year," said Simon Smith, chief economist at FXPro. "For investors looking to preserve capital, sterling will not be the safe-haven that it was during the euro zone debt crisis."
The euro has gained across the board this month, hitting an eight-month high against the dollar and a 17-1/2 month high against the yen. It slipped from those levels on Friday, but for the year it has gained nearly 2 percent against the dollar and over 14 percent against the yen. Against the dollar, sterling was higher on the day at $1.6130, but gains are likely to be limited by worries about the US budget impasse.