The pound strengthened 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 and disposable incomes rose.
Sterling advanced to the strongest level in three weeks against the euro after Spanish protesters marched for a second night in Madrid yesterday, calling for a reversal of austerity measures. Greece’s coalition parties agreed on a fiscal plan that’s key to receiving aid following similar disturbances on Athens’s streets. 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.
“Those numbers probably help cement the view a little further that if you’re looking for a credible alternative to the Eurozone, the U.K. does definitely provide one,” said Simon Derrick, chief currency strategist at Bank of New York Mellon Corp. in London. “The dominant factor is what is happening in Greece and Madrid. Those factors continue to weigh on euro- sterling.”
The pound climbed 0.4 percent to $1.6220 at 2:31 p.m. London time. The U.K. currency gained 0.4 percent to 79.32 pence per euro after appreciating to 79.24, the strongest level since Sept. 6.
Sterling will strengthen to 77 pence per euro before year- end, Bank of New York’s Derrick said.
The decline in U.K. GDP was less than the median forecast of 28 economists in a Bloomberg survey for a 0.5 percent drop. Data today also showed real household disposable income rose 1.9 percent in the second quarter, the biggest jump for three years.
The third-quarter growth 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 market inflation expectation gauge, the five-year, five-year forward break-even rate, dropped to 2.75 percent today from this year’s high of 3.53 percent on Feb. 9. The measure shows how much traders anticipate consumer prices will rise during a period of five-years starting in 2017.
Thousands demonstrated late yesterday near the Spanish Parliament, the same site where police detained and clashed with protesters the night before. Prime Minister Mariano Rajoy risks renewed criticism today when the cabinet approves the 2013 budget and presents measures to bolster the shrinking economy.
Ministers are due to give a press conference this afternoon following a meeting. The draft law will be presented to Parliament on Sept. 29.
“These worries in Europe that have flared over the past couple of days will just get people maybe looking to buy sterling a little bit,” said Paul Robson, a senior foreign- exchange strategist at Royal Bank of Scotland Group Plc in London.
The pound has strengthened 2.1 percent this year, according to Bloomberg Correlation-Weighted Indexes, which track 10 developed-market currencies. The euro tumbled 3.4 percent and the dollar weakened 2.6 percent.
The 10-year gilt yield climbed three basis points, or 0.03 percentage point, to 1.73 percent after dropping as much as 14 basis points yesterday, the most since May 30. The 1.75 percent bond due in September 2022 fell 0.295, or 2.95 pounds per 1,000- pound face amount, to 100.225.
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.