German Chancellor Angela Merkel seemed to have done something significant for the Euro Zone as market sentiment was lifted because of her statement conveying support for the European Central Bank’s plan to intervene in the bond markets. Thus, despite UK’s stronger-than-expected retail sales figures, the Euro gained versus the British pound, primarily driven upward by Merkel’s remarks. In today’s European exchanges, the shared currency is expected to win over the Sterling on speculations that the European leaders are already making a concerted effort to overcome the debt crisis.
On August 2, ECB President Mario Draghi said that the central bank could reactivate its bond purchases to ease borrowing costs in Spain and Italy but it came with a condition that troubled countries should first ask for financial aid from the Euro Zone’s bailout funds before the ECB commences its government bond buying. Merkel seemed to have realized that time is running out for the EU leaders, leading her to take a stance in supporting the ECB’s reactivation of its bond purchases. She said that policymakers “feel committed to do everything” they can “in order to maintain the single currency.” As to the possibility of the ECB’s bond market intervention, she said that the central bank’s decision “has made it clear that the European Central Bank is counting on political action in the form of conditionality as the precondition for a positive development of the Euro.” It could be noted that Germany is usually the number one dissenter over plans to overcome the debt crisis that are not in line with her own ways, but remarks from Merkel likely indicate that the Euro area’s largest economy has moved away from opposing ECB’s potential asset purchases.
In other news, Spain is about to receive the first tranche of the rescue program as Bankia needs the money because uncertainty makes it expensive for the government to raise money in the bond markets, said Arturo Bris, Professor of Finance at the IMD Business School in Switzerland. As to the possibility of a second bailout, Spanish Prime Minister Mariano Rajoy said that decisions are not to be taken yet until the ECB’s actions are already determinable. Considering all these factors, a long position for the EURGBP pair is recommended in today’s European exchanges.
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