EUR/GBP: Spain’s Pain Causes More Troubles for the Euro Zone

In the previous European trading exchanges, the Euro lost against the British pound as outraged citizens of Greece and Spain took the streets and demanded that their respective governments take it slow on budget cuts to prevent both countries from falling into bankruptcy. In contrast, the Sterling once again won versus the single currency as retail sales strengthened in September. In today’s European exchanges, the shared currency is still expected to weaken versus the Pound on increasing concerns about Spain.

Yesterday, Spanish borrowing costs rose above 6 percent, pushing the government closer to requesting financial assistance from the Euro Zone bailout fund, to trigger the European Central Bank’s new bond-buying program. Comments from the Bank of Spain that the economy slowed “at a significant rate,” likely weighed on investor sentiment. The European austerity measures have been met with violent protests in debt-laden Greece and Spain, as the governments seemed to have played deaf to the plea of their respective citizens.

Another headache for the Spanish government is Catalonia, its largest region by output and the most indebted region in the country. Catalonia already asked for an emergency loan worth 5 Billion Euros to meet its debt obligations, but Catalan President Artur Mas said that the region would not be accepting anymore political conditions for the aid. The region already asked for greater autonomy in collecting taxes, but such proposal was rejected by Prime Minister Mariano Rajoy. Mas announced that elections in November would be held after Rajoy disregarded his call for tax autonomy.

Also seen to add pressure to the common currency is the forecast of Ernst & Young for the currency union’s GDP. According to E&Y, growth in the Euro Zone would be sluggish as the region struggles to recover from the debt crisis. The company cut its forecast for GDP to 0.1 percent in 2013, from its previous estimate of 0.4 percent, while maintaining its projection for a contraction of 0.5 percent this year. With Spain’s problems taking a toll on the Euro Zone, the single currency is expected to weaken. Thus, a sell bias is recommended for the EUR/GBP pair in today’s European trades.

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