By Jessica Mortimer
LONDON, Oct 23 (Reuters) - Sterling fell to a near two-month low against a firmer euro on Wednesday as concerns about tighter monetary policy in China cut into riskier currencies and offset an upbeat tone from Bank of England minutes.
Ten-year UK gilt yields also hit a two-month trough, tracking falls in U.S. Treasury yields after below-forecast jobs data on Tuesday reinforced expectations the Federal Reserve will delay scaling back monetary stimulus.
The euro was up 0.4 percent against sterling at 85.22 pence, having hit 85.315 pence, its highest since late August. It stopped just shy of chart resistance at 85.34 pence, the 200-day moving average.
Analysts said a daily close above this level could spur further euro gains.
The BoE minutes showed policymakers were increasingly confident of a robust UK recovery and were comfortable with a firmer exchange rate. This helped pull sterling off its lows against the dollar, although it continued to trade lower on the day.
Sterling was down 0.4 percent at $1.6167, off an earlier low of $1.6119.
In the Asian session, sterling reached a three-week high of $1.6258 as weak U.S. jobs data dented the dollar broadly. But fears of monetary tightening in China and a spike in Chinese short-term money market rates caused riskier currencies to fall.
'Risk took a knock from the China headlines,' said Paul Robson, currency strategist at RBS.
He said sterling/dollar was 'close to topping out' and he expected euro/sterling to rise further. Investors, Robson said, were concerned about whether the recent strength in the UK economic recovery could be sustained.
Sterling was expected to face stiff chart resistance at $1.6260, the Oct. 1 high, and towards $1.63.
However, some analysts and traders expected the pound to rise further as the dollar stays under pressure.
'Sterling/dollar may be in line for a look higher again as this retracement hasn't been so deep ... The dollar is the focal point, with the tapering delay and the change of Fed leadership, and sterling may be a beneficiary,' said Richard Wiltshire, chief FX Broker at ETX Capital.
Alvin Tan, currency strategist at Societe Generale, said he regarded any sterling pullbacks as a buying opportunity.
Benchmark 10-year gilt yields slipped to a new two-month low of 2.593 percent and at the end of the session stood at 2.597 percent, down 4 ticks on the day. December gilt futures settled 34 ticks higher at 111.28.
(Editing by Mark Heinrich) Keywords: MARKETS STERLING/CLOSE
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