Pound heads for worst weekly run versus euro since 2023

By Amanda Cooper

LONDON (Reuters) - The pound headed for its worst weekly performance against the euro in over two years on Friday, as a boost to European spending drove a broad rally in the single currency, while against the dollar, sterling rose ahead of U.S. jobs data.

The euro has surged across the board this week, logging its best weekly performance against the dollar since March 2009.

Against the pound, it was set for a weekly gain of 1.5%, the most since January 2023. 

It was last up 0.4% at 84.03 pence. The pound was up 0.4% against the dollar at $1.292.

European leaders have rallied round Ukraine, with a view to reaching a peace deal, and pledged to spend more on their own defence in view of the shift in the U.S. stance under President Donald Trump.

Spending of around $1 trillion, spurred by Germany's overhaul of its fiscal rules to release funds for infrastructure and defence, as well as European Union efforts to increase its joint borrowing, have transformed investor sentiment.

Equity investors have poured money in at the fastest rate in almost a decade and the euro has soared in response, bringing gains versus the pound to 1.2% so far this year and to 1.1% against the dollar. Sterling by contrast is up just 0.4% against the U.S. currency.

The pound has drawn support from the expectation among traders that the Bank of England will have to cut rates more slowly than other central banks, including the Federal Reserve.

Yet the focus for investors has shifted away from the interest-rate debate and towards the outlook for global capital flows. In particular, they are seeking alternatives to the United States, given a darkening economic outlook and high uncertainty over trade and fiscal policy. 

The mood around the pound is nervous. 

On March 26, the Office for Budget Responsibility, the UK public finances watchdog, issues its own forecasts on the economy and borrowing.

Sluggish economic growth and higher government borrowing costs have put finance minister Rachel Reeves under pressure to clarify how she intends to balance the books without breaking her own fiscal rules.

"A light data calendar has seen the pound continue to trade in the shadow of the euro," analysts at Monex Europe said.

"It is also not a constructive environment for sterling in our view, with growing noises around the difficult decisions facing UK Chancellor Rachel Reeves. We suspect this will become a major focus in the coming weeks, ahead of the March 26 economic update," they said.

(Reporting by Amanda Cooper; Editing by Barbara Lewis)