Sterling hit an eight-month high against the dollar on Tuesday due to surprisingly strong UK house price data, but its gains fizzled out after a moderating decline in U.S. home prices later boosted the U.S. currency. Skip related content
Related photos / videos
Weaker-than-expected figures on UK gross domestic product also stung the pound on the view that the nation's economy continues to struggle, knocking sterling from its highest level of the year hit against a currency basket in early London trade.
Trade was volatile on the last day of the quarter and half-year, and analysts said corporate demand to buy and sell the dollar for last-minute book keeping purposes was driving broader currency movements.
Sterling initially rose more than 1 percent on the day against the dollar to $1.6745, its highest since mid-October, after the Nationwide building society said house prices rose 0.9 percent in June, confounding forecasts for a fall.
But dismal first-quarter gross domestic product data, which posted their biggest fall in 50 years on a quarterly basis, clipped the pound's rally, while the dollar's climb on a moderating fall U.S. house prices exacerbated sterling losses.
"The UK GDP numbers were not great, so we've seen a pullback in sterling as a consequence," said Steve Barrow, head of G10 currency research at Standard Bank in London.
By 3:15 p.m., sterling traded at $1.6440, 0.7 percent lower on the day and off the high hit in early trade, as sluggish U.S. confidence data drove stock prices lower, cooling some demand for risk.
On a trade-weighted basis , the pound was at 84.0, retreating from 84.7 hit in the wake of the currency's rally against the dollar when London trade got underway.
The euro was up 0.3 percent at 85.30 pence, recovering from a slide to 84.37 pence.
HOUSING MARKET BOTTOM?
Housing figures showed an annual rate of price decline of 9.3 percent, the smallest fall since July 2008, which some market participants took as a signal that the ailing market was finally showing signs of stability.
A 2.4 percent contraction in the UK economy in the first quarter, more than an initial reading of -1.9 percent, cooled some optimism that the economy may be stabilising, but some in the market were unshaken by the data, arguing that growth had picked up in the second quarter.
Some analysts said that UK and U.S. housing data suggested that the housing downturn -- one of the main drivers of the financial crisis -- may be bottoming, which would help to repair consumer sentiment and prompt more investors to seek riskier assets, which would benefit sterling.
U.S. data on Tuesday showed that home prices in 20 metropolitan areas dipped 0.6 percent in April from March, when they fell 2.2 percent.
"The improvement in housing data around the world is important ... we're going to be seeing more and more people coming in and buying property on dips," said Neil Jones, head of European hedge fund sales at Mizuho in London.
"We're seeing a shift from a contagion scenario to a recession, so that's an upgrade," he said, adding that this would help sterling to continue its recent upward trend.
Escalating speculation that the deterioration in the UK economy may be slowing has fed risk demand, which has helped sterling to post hefty gains during the second quarter, which ends on Tuesday.
Against the dollar, the pound is on track to post a 16.4 percent quarterly rise, which would its biggest since at least 1982 and its first quarterly rise in a year.
So far this year, it has risen more than 12 percent against the dollar, after it plummeted nearly 30 percent in the second half of 2008.
(Reporting by Naomi Tajitsu; Editing by Victoria Main)
Ryanair boss Michael O'Leary told Sky News the low-cost airline was considering ripping out the back few rows of seats on some flights.
