Sterling edges down against euro after German election

By Greta Rosen Fondahn

(Reuters) - The pound traded lower against the euro on Monday after Germany's conservatives won a national election as expected.

The euro initially rose to its highest in more than two weeks against the pound, but pared some of those gains and was last up 0.1% with one euro at 82.91 pence.

Friedrich Merz was set to become Germany's next chancellor after his party emerged victorious in Sunday's election, though he faces complex and lengthy coalition negotiations after the far-right Alternative for Germany (AfD) surged to a historic second place in a fractured vote.

"The more positive psychological effect of the change of political leadership could be quickly offset and dampened by complicated coalition negotiations," said Carsten Brzeski, global head of macro at ING.

Markets are hoping for reforms to help revive a stagnant German economy, but analysts said on Monday the road to reforms did not look straightforward.

Monday's euro move helped mitigate some of the single currency's loss so far this month against the pound, with the euro now tracking a 0.8% fall in February.

Interest rate expectations still diverge between Britain and the euro zone.

Traders expect the Bank of England to cut rates by a further 54 basis points (bps) this year, but they believe the central bank can only make gradual cuts as UK inflation remains sticky.

Markets however expect the European Central Bank will further ease rates by around 80 bps.

Sterling was broadly unchanged against the dollar at $1.2633, after touching a two-month high of $1.2690 earlier in the session.

Investors this week will monitor remarks from a range of Bank of England speakers.

"This week, the UK data calendar is empty, so all the domestic focus will be on BoE speakers," said Francesco Pesole, currency strategist at ING.

"We'll hear from two doves today – Swati Dhingra and Dave Ramsden –  as well as from hawkish-leaning Clare Lombardelli. Tomorrow, we'll hear from Chief Economist Huw Pill."

(Reporting by Greta Rosen Fondahn; Editing by Amanda Cooper and Alex Richardson)