EUR/GBP: Euro Zone Plagued with Problems

Weak German and French economic fundamentals caused the decline of the Euro versus the British pound in the European trading exchanges yesterday. Industrial production in Germany fell in June, while France’s trade deficit widened in the same month. The single currency’s losses versus the Sterling were limited as the Bank of England cut its forecast for UK economic growth because of the many economic uncertainties. In today’s European exchanges, the shared currency is expected to further fall against the Pound on growing concerns that the debt crisis is getting hard to contain.

Yesterday’s German economic release indicated that the Euro Zone’s largest economy is not spared from the effects of the debt crisis as the nation’s industrial production declined by 0.9 percent attributed to a drop in construction output, when it gained a revised 1.7 percent in May. The bloc’s second largest economy also remains prone to the effects of the debt crisis as its trade deficit further widened to 5.99 Billion Euros in June, from 5.47 Billion Euros in May.

The European Central Bank also warned that the debt crisis hitting the Euro Zone causes the region’s financial markets to become increasingly fragmented. The central bank said that it would intervene to lower rising interest rates only on some circumstances. It said that it could buy government bonds to lower rates, if countries ask help from the region’s bailout funds first.

Meanwhile, the downgrades of Italy and Spain’s credit ratings by DBRS Inc., stressed that growth outlook for the third and fourth largest economies in the region are weakening. Spain was downgraded to A (low), while Italy was cut one level to A, citing that the latter faces “persistent stress in market-funding conditions and rising systematic risks.” Such move by the DBRS Inc. adds pressure to both countries, which are struggling to fight the need to avail of international help as borrowing costs continued to rise to unsustainable levels.

For the Pound, it is deemed to benefit from the statement of BOE Governor Mervyn King that cutting interest rates could be counterproductive, damping speculations that the central bank would decide on another rate cut to trigger economic growth. Given the foregoing factors suggesting the EURGBP pair’s bearish movement, a short position is recommended in today’s European trading session.

Article by AlgosysFx Forex Trading Solutions