Sterling weakened against the euro on Wednesday as traders began to shift heavily into the single currency after Germany announced a massive infrastructure fund and relaxed debt rules to spur spending.
The euro was last up 0.4% against the pound at 83.35 pence, its highest in a week, and is expected to rise for a third straight day after parties seeking to form a government in Germany, Europe's biggest economy, proposed a 500 billion euro infrastructure fund for military and infrastructure needs late on Tuesday.
However, the developments overall led to a strengthening of European currencies against the dollar, with the pound up 0.25% against the greenback to $1.28265, its highest since November 12.
Westpac analysts advised traders to buy the euro against the pound on Wednesday.
“European leaders are aggressively increasing their defence budgets, and while the UK is not far behind, its fiscal space is clearly constrained by both medium-term austerity pressures and market pressures,” they said.
“Significant repricing has already occurred in several EUR-GBP cross pairs, but, strangely, EUR/GBP is still holding closer to multi-year support levels in the 0.8200-0.8300 range.”
Concerns about the U.S. economy amid escalating trade tensions with Canada, China and Mexico also contributed to investors' outflow from the dollar.
US President Donald Trump has imposed a series of tariffs on major trading partners, including new 25 percent tariffs on Canada and Mexico that took effect on Tuesday, and doubling tariffs on Chinese goods to 20 percent.
Canada and China responded with their own tariffs, while Mexico said it would also retaliate but gave no details.
However, sterling is expected to be less exposed to US tariffs due to the more balanced trading position between the United States and the UK.
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The pound's move was partly driven by interest rate differentials and a rise in the British government's borrowing costs on Wednesday, although the sell-off was less severe than in Germany, where German bond yields rose sharply amid a historic sovereign debt restructuring.
Traders are awaiting responses from Bank of England Governor Andrew Bailey and other senior bank officials at 2.30pm GMT on Wednesday.
Sourse: breakingnews.ie
