EUR/GBP: Pound Advances Despite Projected Miss in Budget Deficit Targets

Under pressure to save the Euro, the European Central Bank is gearing up to buy Italian and Spanish government bonds in the open market – but not yet. ECB President Mario Draghi said it will only act after Euro Zone governments activate EU bailout funds to also buy bonds. There will be no ECB intervention before September, and countries being helped will have to accept strict conditions and supervision. Draghi also outlined more moves that could be taken to support the single currency: “The governing council will consider further non-standard monetary policy measures according to what is required to repair monetary policy transmission. In the coming weeks, we will design the appropriate modalities for such policy measures”

The ECB chief admitted that German central bank chief Jens Weidmann has reservations about bond-buying and that further efforts will be needed to persuade the Bundesbank before there is a final vote to take action. Financial markets seemed underwhelmed by the announcements, with some investors having interpreted Draghi’s recent comments as a sign of imminent rather than future and conditional action. The ECB did not cut interest rates this month. They were kept at a record low 0.75 percent despite the Bank’s experts concluding that Euro Zone economic growth is weak and will recover only very gradually as uncertainty about the outlook is sapping confidence.

As investor expectations from the ECB were rewarded with disappointment, the Sterling looks to gain. A sell position is suggested for the EURGBP to close the week’s trades.

Be wary though of likely price corrections as a result of news that the British economy will shrink by 0.5 percent this year, forcing Chancellor of the Exchequer George Osborne to miss his budget-deficit target. The economic deterioration has been even more pronounced than previously forecast as private-sector retrenchment is made worse by fiscal consolidation and a dysfunctional financial system.

Article by AlgosysFx Forex Trading Solutions