Pound hits 8-month high vs dollar

The pound rallied on Tuesday, hitting an eight-month high against the dollar after a surprising rise in monthly house prices offered signs that the deterioration in the housing market may have slowed.

Against a basket of currencies, the pound rose to its highest since November after the Nationwide building society said that house prices rose 0.9 percent in June, wrongfooting forecasts for a fall, to take the annual rate of decline to 9.3 percent, the smallest fall since July 2008.

Analysts were surprised by the figures and cautioned that the monthly rise in prices may be a reflection of an ongoing shortage of supply, but added that the second month of price gains was positive for the broad economy, the banking sector and therefore sterling.

"It is an encouraging piece of news not only in what it reflect that there might be some housing market activity but because (weak house prices) have been one of the key stresses on the banking system," said David Page, economist at Investec in London.

"The removal of that constraint, as well as being good in its own right for the housing market, is positive for the banking system and cable, as the two are heavily linked."

For more clues into the health of the economy, markets await a final estimate of first quarter growth at 9:30 a.m. The economy is expected to have contracted 2.1 percent on the quarter, and 4.3 percent on the year.

The pound climbed as high as $1.6745, its strongest since mid-October 2008, after the data was released in early London trade. By 8:53 a.m., it had trimmed some of those gains to trade at $1.6675, up 0.8 percent on the day.

Sterling's gains against a broadly weaker dollar helped to push the pound's trade-weighted index to 84.7, its highest since November, according to Bank of England data which track the pound's movements against a basket of currencies.

The euro fell 0.6 percent to 84.48 pence, near the day's low around 84.35 pence and inching closer to a near-seven-month low of 83.97 pence hit earlier in the month according to Reuters data.

Sterling has posted hefty gains during the second quarter, which ends on Tuesday, due to escalating speculation that the deterioration in the UK economy seen from a year ago may have hit a bottom, and is showing some signs of improvement.

Against the dollar, the pound is on track to posting a 16.4 percent quarterly rise, which would its biggest since at least 1982 and its first quarterly rise in a year.

In January-March, the pair fell roughly 2 percent, while it plummeted 18 percent in October-December and 10.5 percent in July-September.

Commodity weakness drives FTSE fall

Britain's top share index fell 1.3 percent early on Thursday, as equities fell broadly, led lower by energy and mining stocks which fell on retreating commodity prices.

Energy companies, which gained the previous session tracking higher oil prices, turned tail as crude dipped back below $70 per barrel.

BP (BP.L), Royal Dutch Shell (RDSa.L), BG Group (BG.L), Tullow Oil (TLW.L) and Cairn Energy (CNE.L) fell between 1.1 and 2.6 percent.

By 8:47 a.m., the UK blue chip index was 61.08 points lower at 4,279.63 after closing 91.50 points higher on Wednesday at 4,340.71 on the first day of the new quarter.

"The market is finding it hard to gain any direction after the strong uplift in April and May," said Jeremy Batstone-Carr analyst at Charles Stanley.

"It's torn between a view that earnings forecasts for 2009 may be raised and those for 2010 may be cut."

PAYROLLS EYED

No domestic data is due for release on Thursday, so all the attention will be on the U.S. nonfarm payrolls -- bought forward a day from Friday this month due to the Independence Day holiday -- which are forecast to come in with a fall of 355,000 in June, after May's less then expected 345,000 decline.

U.S. unemployment is estimated to rise to 9.6 percent last month, up from 9.4 percent in June.

"I certainly think unemployment will continue to rise over the next few months and maybe into next year, and this will bring its own negative impact on aggregate demand," Batstone-Carr said.

Investors will also have the latest weekly U.S. jobless claims, May factory goods, and revised durable orders numbers to digest on Thursday.

And news out of the latest monthly European Central Bank Committee meeting will also be eyed, though no change is expected to monetary policy with euro zone interest rates already at a record low.

Miners were also hit by weaker demand for raw materials as metal prices slipped.

Xstrata (XTA.L), Kazakhmys (KAZ.L), Eurasian Natural Resources (ENRC.L), Anglo American (AAL.L), Lonmin (LMI.L) and BHP Billiton (BLT.L) fell between 1.1 and 4.1 percent.

Rio Tinto fell 2.6 percent after a $15.2 billion rights offer, the fifth-biggest on record, putting the world's top iron ore miner back into growth mode after a debt-funded purchase of Alcan had brought it to its knees.

The dip in equity prices was broad-based with defensive drugmakers and life insurers also among those well into negative territory.

AstraZeneca (AZN.L), GlaxoSmithKline (GSK.L) and Shire (SHP.L) fell 1.1 to 1.8 percent while Aviva (AV.L) lost 3.4 percent and Legal & General slipped 1.6 percent.