LONDON: Sterling edged away from a two-week low against the dollar on Thursday as talk of stimulus in China boosted equities and riskier currencies, but uncertainty over when Spain may request a bailout capped any gains.
Although the market's focus was centred on events elsewhere, in particular on Spain's 2013 budget later, traders will be watching the final estimate to UK second quarter gross domestic product due at 0830 GMT.
It is forecast to confirm the economy contracted by 0.5 percent quarter-on-quarter, marking the third consecutive fall in output, though analysts said there was a chance it may be revised up, giving the pound a brief lift.
"There is a risk the GDP data will be revised up and this would have a bit of a positive impact on sterling, although it would probably be short-lived because it would still show the UK in deep recession," said Kathleen Brooks, research director at FOREX.com.
Sterling was up 0.2 percent at $1.6196, recovering from a two-week low of $1.6137 reached on Wednesday. However, it stayed well below last week's 13-month peak of $1.6310.
Riskier currencies got a lift after a strong rally in Chinese equities on bets the country may take more steps to arrest a slowdown in growth and to prop up its stock market.
Investors were cautious, however, before the Spanish budget presentation. This could form the basis of a potential bailout deal in the future and analysts said this would be taken positively by the market.
But Spain has been reluctant to request a bailout recently, which it must do in order to trigger the European Central Bank's new bond-buying programme. This has weighed on the euro and riskier currencies, including the pound, while markets were spooked by violent protests in the country this week.
"If what happens in Spain does calm down there is no reason why sterling couldn't trade above $1.63 ... There is a chance that Spain in their budget include details around an EU economic reform plan," FOREX.com's Brooks said.
The pound outperformed the euro, which edged down 0.1 percent to 79.54 pence, though it stayed above a low of 79.36 pence struck earlier this week.
Recent data has suggested the UK economy recovered in the third quarter, which has helped the pound gain.
Bank of England policymaker Paul Fisher was quoted as forecasting "a very strong gross domestic product number" in the third quarter in an interview with the Sun newspaper on Thursday.
The pound may also be helped by talk of farm subsidy payments due later in the week, which the European Union makes to the UK once a year. The subsidy could see around three billion euros of flows into the UK, market players said.
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