Sterling eases against the euro as eyes on Germany's debt overhaul

By Yadarisa Shabong

(Reuters) - The pound weakened against the euro on Wednesday as traders piled into the common currency after Germany's plan for a massive infrastructure fund and an easing of debt rules to boost spending, though the British currency did gain on the dollar.

The euro was last up 0.4% on the pound at 83.35 pence, its highest in a week, and set for its third straight day of gains, after the parties seeking to form a government in Germany, Europe's biggest economy, proposed late on Tuesday a 500 billion euro ($535.50 billion) infrastructure fund for military and infrastructure spending.

Those developments boosted European currencies in general against the dollar, however, with the pound rising 0.25% versus the dollar to $1.28265, its highest since November 12.

Analysts at Westpac on Wednesday recommended traders buy the euro against the pound.

"European leaders are aggressively ramping defence budgets and while the UK is no slouch either, UK fiscal finances are more obviously constrained, both by medium term austerity pressures and market pressures," they said.

"A material reset in several EUR-crosses has already played out but EUR/GBP curiously is still holding nearer multi-year supports in the 0.8200-0.8300 area."

Worries about the U.S. economy amid escalating trade tensions with Canada, China and Mexico were also driving investors away from the greenback.

U.S. President Donald Trump has enacted a swathe of tariffs against his country's biggest trading partners, including new 25% tariffs against Canada and Mexico that were effective from Tuesday, alongside a doubling of duties on Chinese goods to 20%.

Canada and China have responded with tariffs of their own, while Mexico said it would retaliate too but without giving details immediately.

Sterling, however, is expected to be less impacted by U.S. tariffs due to the more balanced trading position between the United States and Britain.

The pound's moves were in part a function of rate differentials and British government borrowing costs climbed on Wednesday, though the selloff was less than that in Germany where German bond yields soared on Germany's historic debt overhaul. [GVD/EUR]

Traders are waiting for Bank of England Governor Andrew Bailey and other top bank officials to answer questions from 1430 GMT on Wednesday from lawmakers about their decision to cut interest rates in February.

Interest rate futures are currently pricing two more quarter-point rate cuts by the Bank of England this year. Expectations of a third such move have been reduced this week.

"While we ultimately think that the BoE cuts three times this year, the recent mood music from the BoE doves has been caution and the need for gradual rate cuts," Chris Turner, Global Head of Markets at ING, said.

($1 = 0.9337 euros)

(Reporting by Yadarisa Shabong in Bengaluru and Alun John in London; Editing by Gareth Jones)