(Update quotes, adds comments)
By Michelle Chen
LONDON, June 29 (Reuters) - Sterling rallied against the dollar on Friday after European leaders agreed measures to cap weaker euro zone nations' borrowing costs, boosting demand for perceived riskier currencies.
At a two-day meeting that started on Thursday, euro zone policymakers also agreed to create a single supervisory body for the euro zone's banks.
The deals surprised many investors who were braced for an action-free summit given apparent German resistance to any concessions on debt.
Further gains for sterling are likely to be dependent on the strength of UK economic data next week and market reaction to a Bank of England meeting on Thursday, at which policymakers are expected to announce further asset purchases to boost growth.
"Sterling is looking quite perky against the dollar because there is more risk appetite as the Germans are more flexible," said Richard Wiltshire, chief FX broker at ETX Capital.
The pound rose more than 1 percent against the dollar to $1.5705, its highest level in a week, with resistance expected around the 200-day moving average at $1.5750.
Michael Sneyd, currency strategist at BNP Paribas said it could move towards $1.58 against the dollar if U.S. non-farm payrolls data next week is weaker than expected.
The euro rose around 0.8 percent against the pound to hit a session high of 80.94 pence. Market players said resistance was expected around 81.00 pence and the June 11 high of 81.63 pence.
Some strategists questioned whether the EU summit had thus far addressed structural problems in the euro zone and said investors may look to sell into the rally.
Such a move could benefit sterling against the euro as many investors see the UK as a relative haven from the debt crisis. Sterling's trade-weighted index was set to post its fourth straight quarter of gains, in part thanks to portfolio flows that have been diverted from the euro zone into the UK gilt market.
Many market players are convinced the BoE will announce more quantitative easing next week to prop up the UK economy which has slipped back into a second recession since the 2008 global financial crisis.
At the June meeting policymakers were narrowly split 5-4 in favour of keeping the QE total unchanged at 325 billion pounds.
While some analysts said more QE could weigh on sterling by increasing the total supply of the pounds in the system, others argued it could support the currency if investors cheer measures to shield the economy from the euro zone crisis.
The BoE's risk watchdog, the Financial Policy Committee, said on Friday that the UK's outlook had worsened as a result of the euro zone crisis.
"We don't think this (QE) is going to weaken sterling. In the past QEs from the BoE, there's little evidence that it has weakened sterling and we think that will be the case going forward," BNP Paribas' Michael Sneyd said.
Sneyd said sterling was very aggressively sold after the global financial crisis which meant it was now very cheap and could appear attractive as a long term investment.
Investors are also likely to be focused on services, manufacturing and construction PMI data due next week, to help gauge the country's economic health. A Reuters poll showed growth in the dominant services sector is expected to slow to 52.8 in June from 53.3 last month.
(Editing by Ruth Pitchford)
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