Sterling Extends Drop Versus Euro After German Fiscal Boost
Recently, the British pound continued its decline against the euro, reaching its weakest level since January. This movement comes as the euro gains strength due to an optimistic growth outlook, attributed to Germany’s recent announcement to significantly enhance fiscal spending.
As of the latest figures, sterling was recorded at 83.85 pence per euro, marking a 0.2% drop for the day. This week, the pound has fallen by approximately 1.5%, positioning it for its largest one-week decline since January 2023.
According to Kirstine Kundby-Nielsen, an FX analyst at Danske Bank, the situation is largely influenced by the widespread optimism surrounding the euro, following Germany’s fiscal policy shift.
On Tuesday, parties poised to form Germany’s next government agreed to relax fiscal rules and established a 500 billion euro special fund aimed at boosting infrastructure. This decision sent the euro surging against major currencies and led to an increase in bond yields, fueled by expectations of heightened borrowing.
In light of these developments, major investment banks have swiftly revised their growth forecasts for Germany and the broader euro zone. Some analysts now anticipate fewer interest rate cuts from the European Central Bank (ECB).
The ECB was expected to announce its policy later on Thursday, with widespread predictions of a 25 basis points reduction in the deposit rate, marking the sixth cut in the current easing cycle.
Meanwhile, the Bank of England, maintaining a “careful” approach to interest rate cuts, recently lowered borrowing costs for the third time since August, reflecting their cautious stance.
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Turning to the dollar, the pound experienced a slight dip of 0.1%, even though it had earlier reached its highest point in four months at $1.2924.
Focusing on domestic affairs, the UK’s construction sector revealed significant contraction last month, as highlighted by a recent survey. The preliminary results from the S&P Global/CIPS UK Construction Purchasing Managers’ Index showed a decrease to 44.6 last month, compared to January’s 48.1, marking its lowest level since May 2020.
Elliott Jordan-Doak, a senior UK economist at Pantheon Macroeconomics, commented on the situation, noting, “Rocketing uncertainty around global trade policy, rising materials prices, and the looming payrolls tax hike in April all conspired to further sap confidence.”
Furthermore, the all-sector PMI, which captures data from services, manufacturing, and construction combined, dropped to a 16-month low of 50, descending from 50.3 in January.
