The euro gained on sterling for the second consecutive day on Thursday on speculation that the euro-zone interest rates will catch up with the UK early next year.

The euro traded at 67.20p in currency trading early on Friday, from 67.13p yesterday, while the pound traded at $1.9634, from $1.960. 

"Sterling is looking overvalued, as we've got too much priced in in terms of rate hikes," currency strategist Jeremy Stretch of Rabobank Groep in London told Bloomberg.

"There's no necessity for the Bank of England to raise rates in the first quarter of next year."

The euro has also been buoyed by recent reports revealing high German business optimism and showing that inflation in the country has risen to a four month high.

The 2007 UK forecast was changed by Deutsche Bank this week, which is now predicting that the Bank of England will cut the cost of borrowing in the next year.