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Pound Falls Most in Five Weeks Versus Euro After Economy Shrinks

The pound fell the most in five weeks against the euro after a government report showed the economy shrank more than first estimated, strengthening the case for more central-bank stimulus.

Sterling dropped for a second day versus the dollar, paring its first quarterly gain since the three months ended June, as the data also showed household disposable income declined. Bank of England Governor Mervyn King said yesterday he has an open mind on whether more asset purchases, or quantitative easing, is needed to boost the economy. Gilts rose.

“The data was a touch disappointing and that put sterling on the back burner,” said Neil Jones, head of European hedge-fund sales at Mizuho Corporate Bank Ltd. in London. “There’s a refreshed dovish element to the pound since King yesterday. Anything that comes from an official, which lays the door open for possible further QE, takes the shine off the pound.”

The pound weakened 0.6 percent 83.95 pence per euro, the biggest drop since Feb. 22, before trading 0.5 percent lower at 83.88 pence at 4:43 p.m. London time. Sterling depreciated 0.7 percent to $1.5847, trimming this quarter’s gain to 2.1 percent.

U.K. gross domestic product dropped 0.3 percent in the fourth quarter from the previous three months, compared with a previous estimate of 0.2 percent, the Office for National Statistics said in London. Real household disposable income fell 0.2 percent, the second successive quarterly decline.

U.K. Gilts

The pound fell 0.4 percent today, the biggest decline among 10 developed-nation currencies tracked in Bloomberg Correlation-Weighted Indexes. The euro gained 0.1 percent and the dollar rose 0.4 percent.

The yield on the 10-year gilt dropped five basis points, or 0.05 percentage point, to 2.21 percent. The 4 percent bond due March 2022 rose 0.505, or 5.05 pounds per 1,000-pound face amount, to 115.9 percent of face value.

Gilts have handed investors a loss of 2.1 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Demand for U.K. assets has waned in 2012 as European leaders made progress in resolving the region’s sovereign-debt crisis and Greece won partial forgiveness from its private-sector creditors. Italy’s borrowing costs declined today as the nation sold 8.5 billion euros ($11.3 billion) of bills at the lowest yield in more than a year.

Sterling may extend its drop after yesterday failing to stay above $1.60, which may have pushed it toward its high from October and November, according to Michael Hewson, an analyst at CMC Markets U.K. Plc in London.

The U.K. currency may fall to $1.5820 should it break below “key support” at $1.5920, Hewson wrote in a note to clients. “Once below that, the $1.5610, 50 percent retracement of the entire up move from $1.5240 to the $1.5990 highs, remains a key support,” he said

Support refers to an area on a chart where analysts anticipate orders to buy a currency to be grouped.

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