Sterling extends drop versus euro after German fiscal boost

By Samuel Indyk

LONDON (Reuters) - The pound extended a slide against the euro on Thursday, dropping to its weakest level since January as the single currency benefited from an improving growth outlook after Germany announced plans to massively boost fiscal spending.

Sterling was last at 83.85 pence per euro, down about 0.2% on the day. It's dropped about 1.5% this week, and is on course for its biggest one-week fall since January 2023.

"It's all to do with the broad-based euro optimism that we've seen with this shift in fiscal policy in Germany," said Kirstine Kundby-Nielsen, FX analyst at Danske Bank.

On Tuesday, the parties looking to form the next government of Germany, Europe's largest and the world's third largest economy, agreed to loosen fiscal rules and create a 500 billion euro special fund to boost infrastructure.

That sent the euro surging against major peers and pushed bond yields higher on expectations for more borrowing.

Major investment banks have been quick to lift their growth forecasts for Germany and the euro zone bloc, while some now expect fewer interest rate cuts from the European Central Bank.

The ECB announces policy later on Thursday and is widely expected to lower its deposit rate by 25 basis points, the sixth reduction in the easing cycle.

Bank of England rate setters, meanwhile, are generally sticking to their "careful" approach to interest rate cuts, having lowered borrowing costs for the third time since August last month.

Against the dollar, the pound was down 0.1%, having earlier risen to its highest in four months at $1.2924.

Britain's construction sector contracted sharply last month, a survey showed on Thursday.

The preliminary reading of the S&P Global/CIPS UK Construction Purchasing Managers' Index fell to 44.6 last month from January's 48.1, its weakest level since May 2020.

"Rocketing uncertainty around global trade policy, rising materials prices, and the looming payrolls tax hike in April all conspired to further sap confidence," said Elliott Jordan-Doak, senior UK economist at Pantheon Macroeconomics.

The all-sector PMI, which combines services, manufacturing and construction, fell to a 16-month low of 50, down from 50.3 in January.

(Reporting by Samuel Indyk; Editing by Bernadette Baum)