Pound Gains for Second Day Versus Euro on Bets Economy Will Grow

By David Goodman - Oct 10, 2012 5:39 PM GMT+0800

The pound strengthened for a second day versus the euro on bets the U.K. economy returned to growth in the last quarter, boosting demand for its assets.
Sterling was little changed against the dollar before U.K. Prime Minister David Cameron addresses the Conservative Party Conference in Birmingham, England, today. U.K. economic growth expanded at its fastest pace in five years in the third quarter, the National Institute of Economic and Social Research said yesterday. Gilts declined for the first time in three days after Bank of England Governor Mervyn King said yesterday inflation targeting should remain at the heart of monetary policy.

“The U.K. looks in slightly better shape than the euro zone,” said Jeremy Stretch, head of foreign-exchange strategy at Canadian Imperial Bank of Commerce in London. “The Niesr numbers yesterday suggest fairly solid growth in the third quarter, which has provided some interest,” in the pound, he said.
The U.K. currency gained 0.2 percent to 80.35 pence per euro as of 10:38 a.m. London time, after dropping to 81 pence yesterday, the weakest level since Sept. 17. Sterling traded at $1.5999, after dropping to $1.5977, matching the lowest since Sept. 10.

Fastest Expansion

U.K. gross domestic product rose 0.8 percent, compared with a revised 0.1 percent in the quarter through August, Niesr, whose clients include the Bank of England, said. That’s the fastest expansion for a calendar quarter since the third quarter of 2007.

The U.K. economy is in its first double-dip recession since the 1970s, and has contracted for the past three quarters through June, according to data from the Office for National Statistics. The ONS will announce the third-quarter figure on Oct. 25.

The pound has strengthened 0.5 percent in the past six months, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro fell 2.3 percent and the dollar weakened 0.4 percent.

The 10-year gilt yield rose three basis points, or 0.03 percentage point, to 1.75 percent. The 1.75 percent bond due September 2022 fell 0.25, or 2.50 pounds per 1,000-pound face amount, to 99.96.
“The case for price stability is as strong today as it was 20 years ago,” King said at the London School of Economics yesterday. While there are circumstances where it may be “justified to aim off” the central bank’s inflation target of 2 percent for a while, he said this wasn’t a call for a change to the bank’s remit.
Gilts returned 3.1 percent this year through yesterday, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bonds also gained 3.1 percent and U.S. Treasuries rose 1.9 percent.

To contact the reporter on this story: David Goodman in London at dgoodman28@bloomberg.net