Pound Advances as U.K. Growth Beats Forecast Amid Spain Protests

By Lucy Meakin and Anchalee Worrachate - Sep 27, 2012 11:37 PM GMT+0800

The pound rose for the first time in four days against the dollar after a government report showed the economy shrank less than previously estimated in the second quarter, adding to optimism the recession is easing.

Sterling climbed to a three-week high versus the euro after Spanish protesters marched for a second night in Madrid yesterday, calling for an end to austerity measures. A general strike in Greece yesterday attracted as many as 35,000 protesters into downtown Athens. U.K. government bonds fell, with 10-year yields rising from the lowest in two weeks.

The economic growth “numbers probably help cement the view a little further that if you’re looking for a credible alternative to the euro zone, the U.K. does definitely provide one,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. (BK) in London. “The dominant factor is what is happening in Greece and Madrid. Those factors continue to weigh on euro-sterling.”
The pound appreciated 0.2 percent to $1.6192 at 4:37 p.m. London time after dropping 0.4 percent over the previous three days. The U.K. currency gained 0.4 percent to 79.35 pence per euro after reaching 79.24 pence, the strongest since Sept. 6.
Sterling will climb to 77 pence per euro before the end of the year, Bank of New York Mellon’s Derrick said.
U.K. gross domestic product fell 0.4 percent in the second quarter, instead of the 0.5 percent decline estimated last month, the Office for National Statistics said in London. Real household disposable income rose 1.9 percent in the second quarter, the biggest jump for three years.

‘Very Strong’

The third-quarter GDP number is likely to be “very strong,” Paul Fisher, markets director at the Bank of England, was quoted as saying in an interview with The Sun newspaper.
The central bank’s favored inflation gauge, the five-year, five-year forward break-even rate, climbed five basis points to 2.75 percent, after falling to 2.7 percent, the lowest since Sept. 3. The measure shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.
Thousands demonstrated yesterday near the Spanish Parliament, where police detained and clashed with protesters the night before. Greece faces a financing gap that won’t be closed by budget measures because the recession and delayed privatizations have weakened its fiscal situation, International Monetary Fund chief Christine Lagarde said Sept. 24.

‘Buy Sterling’

“These worries in Europe that have flared over the past couple of days will just get people maybe looking to buy sterling,” said Paul Robson, a senior foreign-exchange strategist at Royal Bank of Scotland Group Plc in London.

The pound has strengthened 1.9 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro tumbled 3.6 percent and the dollar weakened 2.6 percent.

The 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 1.72 percent after dropping as much as 14 basis points yesterday, the biggest decline since May 30. The 1.75 percent bond due in September 2022 fell 0.25, or 2.50 pounds per 1,000-pound face amount, to 100.27.
U.K. debt was the most volatile among developed-market government bonds today, according to measures of 10-year bonds, the spread between two- and 10-year securities and credit default swaps.
Gilts returned 3.6 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds also gained 3.2 percent and U.S. Treasuries rose 2.4 percent.

To contact the reporter on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net
To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net