With the Euro Zone economy continuing to take a hit from the heightened uncertainty over a way forward for the debt crisis plaguing the region, the Euro is deemed to lose ground opposite the British pound today. Bundesbank voiced its opposition to the European Central Bank’s bond-buying plans, while an ally of German Chancellor Angela Merkel suggested a Greek exit from the bloc by next year, both reflecting mounting skepticism over the policies being used to combat the crisis. Such uncertainty is seemingly hampering economic prospects in the bloc as a report on German business confidence is projected to reach a more than two-year low this month.
In an interview with Der Spiegel, Bundesbank President Jens Weidmann said that the proposed new wave of sovereign bond purchases by the ECB could increase the Euro Zone governments’ reliance on such funding. Saying that the bond purchases could become addictive like a drug, such measures are unlikely to solve the debt crisis. Earlier this month, ECB President Mario Draghi expressed that the central bank may intervene to lower yields in countries that ask Europe’s bailout fund to buy its bonds. Meanwhile, Alexander Dobrindt, general secretary of the governing Bavarian Christian Social Union, told the German newspaper Bild that Greece would not be part of the Euro in 2013. Although German Chancellor Angela Merkel quickly calmed the markets by rebuking such Greek exit talks, the comments suggest the ongoing turmoil within the region’s largest economy over a resolution to the crisis.
The lone economic report which is coincidentally from Germany is believed to underpin the view that the crisis is gradually taking its toll on the economic outlook for the region. Economists estimate that the German Ifo Business Climate will decline from 103.3 points to 102.7 points in August, potentially its weakest reading since June 2010. With turmoil from the crisis continuing to hurt business confidence, the German economy, which has long spearheaded the overall economy, is likely to lose further steam in the coming months.
Heading over to the UK, the Office for National Statistics revealed that the British economy shrank by 0.5 percent in the second quarter from initial estimates of a 0.7 percent contraction, a sign that the double-dip recession is not as deep as first thought. A revision of construction output largely drove the modest improvement, with output contracting by 3.9 percent instead of 5.2 percent. Industrial production was also revised up from -1.3 percent to -0.9 percent. Although the data still suggest underlying weakness in the economy, the rare bit of positive news is deemed to buoy the Sterling today. Hence, a short position is recommended for the EUR/GBP trades today.
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