Sterling set for biggest weekly rise in months against euro

Oct 2 (Reuters) - Sterling was on track for its biggest weekly rise against the euro in months, as mounting concerns over the fiscal outlook of some of the euro area's most indebted countries dented confidence in the single currency.

However, the pound was set for its third straight weekly drop against the dollar, which strengthened after the mid-September Federal Reserve’s hawkish shift.

Any move towards rejoining the European Union will be under the spotlight after Prime Minister Andy Burnham, who campaigned to stay in the EU in a 2016 referendum, argued the nation should again consider options, including rejoining the bloc.  

Markets would likely welcome such a move, having viewed Brexit as a long-term headwind for sterling since the 2016 referendum.

Ahead of a UK-EU summit expected around November 20, investors will be watching for signs that prospects of closer ties lend support to the British currency.

The single currency was up 0.05% at 85.23 pence on Friday, and was set for a 0.87% weekly fall, the steepest since May.

“Reports suggesting progress towards a broader UK-EU reset may be modestly supportive for Sterling sentiment,” Evelyne Gomez-Liechti, multi-asset strategist at Mizuho, said.

The pound rose 0.09% to $1.3204 on the day, after hitting $1.3181 on Thursday, its lowest level since June 25.

The euro/dollar rose on Friday as oil prices dropped but was on track for a weekly fall as the energy shock and France’s debt concerns weighed on sentiment. 

"We don’t expect this to provide any lasting support for the pound, however, as another referendum is both fanciful and, in our view, highly unlikely to see the light of day," Matthew Ryan, head of market strategy at global financial services firm Ebury, said, referring to the EU-UK relationship.

The rate outlook is also under the spotlight after the Federal Reserve's hawkish shift in mid-September.

Traders are pricing in around 30 basis points of monetary tightening from the BoE by year-end and about 90 bps by the end of 2027.

(reporting by Stefano Rebaudo; editing by Andrew Cawthorne)