Sterling slipped against the dollar on Friday, tracking softness in the euro, with investors nervous about buying perceived riskier currencies ahead of Sunday's European Union summit.
Market players said the pound would be vulnerable to shifts in sentiment in the run up to the summit, where policymakers hope to make progress in tackling the euro zone debt crisis but remain deeply divided.
Sterling was likely to fall versus the dollar and outperform the euro if policymakers disappoint the market, although lower expectations were already being priced in, analysts said, meaning any slide could be limited.
Sterling was last trading down 0.1 percent at $1.5774. Against the euro it was up, with the single currency falling 0.1 percent to 87.12 pence.
Support for the euro was seen around 86.80-90 pence, a level the single currency has bounced off twice this week. Traders cited stops just below that level at 86.75.
"Sterling is euro-focused ahead of the weekend. If the summit disappoints cable will come lower but euro/sterling will bear the brunt of it," said Adrian Schmidt, FX strategist at Lloyds Bank.
"Although 86.80-90 has been a bit of a graveyard for people looking for a break in euro/sterling. We may have another go today but have never really managed to break through."
Schmidt said while riskier currencies would suffer if policymakers failed to make progress on Sunday, investors would be wary of selling them too aggressively after France and Germany said no decisions would be adopted before a second meeting to be held by Wednesday at the latest.
On the domestic front, UK public sector net borrowing figures at 0830 GMT, expected to show a slight decrease in borrowing, will provide a gauge of how the government's deficit reduction plans are progressing.
Analysts said with euro zone issues dominating sterling, the impact of UK data was likely to be limited.
"If the public sector borrowing figures are better we could get a small bounce in sterling but the prevailing trend is all about the euro," said Kathleen Brooks, research director at Forex.com.
Many investors are seeing little upside for sterling in coming months after BoE policy minutes on Wednesday hinted that more asset purchases may be needed in coming months to prop up the UK economy.
read more: Olympus Wealth Management
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