Sterling rose to a 20-month high against a weakened euro on Monday as political uncertainty in France and the Netherlands, combined with a grim economic outlook in the euro zone, prompted investors to flee the common currency.
The euro fell 0.6 percent against the pound to 81.49 pence, its lowest since August 2010, as markets digested the first round of the French presidential election and the Dutch cabinet's resignation, which undermined confidence in the core of the euro zone.
If you were to be bullish on sterling on any cross it would be against the euro. We believe the UK economy will show gradual improvement going forward and the market will recognise the UK is in a much better situation than the euro zone, said Sara Yates, currency strategist at Barclays Capital.
In the euro area there are an awful lot of risks coming up, that helps reignite concerns about the political side.
A German PMI survey unexpectedly showed manufacturing shrank at its fastest pace in nearly three years in April, also boosting the pound against the euro.
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We remain short (of the euro) looking for a move through stop-losses at 81.40, which will open the next target at 80.65, said a spot trader at a major European bank.
Trade-weighted sterling climbed to 83.2 according to Bank of England data, the highest since August 2009, as cautious hopes that the British economy may avoid recession following Friday's upbeat UK retail sales data boosted the pound.
Sterling retreated from a 5-1/2 month high against the dollar of $1.6155, however, as euro zone concerns prompted broad demand for the safe-haven greenback.
The pound was last down 0.3 percent on the day at $1.6080, although its technical outlook remained constructive after it closed above its 200-week moving average around $1.5940 last week for the first time since August 2008.
With no UK data scheduled for Monday, the pound was largely driven by sentiment towards the euro zone. But public sector borrowing data on Tuesday and the first estimate of 2012 first quarter gross domestic product data on Wednesday could provide more direction.
GDP data is expected to show modest 0.1 percent growth after the economy shrank 0.3 percent in the final quarter of 2011, but some strategists said it could disappoint.
There is a possibility of a downside surprise and Q1 GDP could show a further contraction, which could weigh on demand for sterling ahead of Wednesday, Lloyds analysts said in a note.
(Additional reporting by Nia Williams; Editing by Catherine Evans)