The British pound is down against the euro on Wednesday afternoon after Germany announced it will suspend its debt break provision in the German constitution to allow higher deficit spending with the purpose of combating the country’s economic slowdown.

GBP/EUR was lower by 52 pips (-0.44%) at 1.1891 with a daily price range of 1.186 to 1.197 as of 1.30pm GMT. The currency pair turned lower in European trading, having stalled at the 1.197 level on a third attempt in the last week on Tuesday.

The EUR benefits from debt relief plan

Germany has confirmed it will temporarily loosen its fiscal purse strings in order to stimulate the economy and buffer it from the negative effects of the coronavirus. Finance Minister Olaf Scholz has already acknowledged the need for higher spending in a joint statement with other European finance leaders last week. Recent economic statistics out of Germany, including this morning’s prediction from the DIW Economics Institute that the economy would grow by only 0.1% in the first quarter may have hastened the timing.

Today the Finance Ministry announced plans to modify the debt break provision in the German constitution so that the federal government can assume some the of the obligations of heavily indebted municipalities. Germany’s constitution, with memories of the Weimar republic as a motivation puts strict rules on the level of German government borrowing. The debt relief plan would allow those indebted municipalities to spend more on infrastructure and other projects that would serve to expand the economy after two successive quarters of no economic growth.

GBP down due to a weaker USD

The pound was higher against other G10 counterparts but was lower against the euro. This is in part because of some weakness in the US dollar which tends to benefit the euro more than the pound because of the higher average volume of trades in the euro than the pound. There is not a lot of UK economic data  to dig into but the data there was disappointed expectations. The British Retail consortium (BRC) Shop Price Index, a measure of price changes in popular retail outlets fell -0.6% when a smaller drop of -0.3% was expected.


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