EUR/GBP: Effects of Policy Outlooks to End the Week’s Trades

A firm stance by the European Central Bank yesterday is hoped to deliver sustained gains for the Euro currency over its British counterpart. Though the Bank of England likewise did not make any moves with regard to policy decision, there is intensifying dissent on inflation risks that threatens to cause a rift on future aid for the UK economy. In so far as currency trades are involved, the EUR/GBP enjoys a bullish channel since a low of 0.7921 in the exchanges late last week.

During the 54-minute press conference in Slovenia yesterday, ECB President Mario Draghi stated nine times that the central bank will not start intervening in bond markets until governments like Spain request a bailout and agree to conditions. He also ruled out allowing the ECB to take losses in any further Greek debt restructuring and damped speculation of another ECB interest-rate cut.

According to Draghi, the bank’s recently announced bond buying program had eased market tensions, even though it has not yet commenced. “OMTs (Outright Monetary Transactions) have helped to alleviate… tensions in financial markets over the past few weeks, thereby reducing concerns about the materialization of destructive scenarios.”

The central bank chief commended Madrid for making “significant progress” but that challenges remained for the country. He said the ECB had mechanisms in place should Spain request aid, but that he would also seek involvement from the International Monetary Fund. He likewise assured Madrid that the conditionality involved in a rescue package does not necessarily need to be harsh. Draghi emphasized it was up to Spain to decide whether to solicit aid. Spain is widely seen as the primary candidate for OMT, but has so far resisted applying.

An auction yesterday saw Spanish borrowing costs fall in most cases. The yield on Spain’s 10-year government bond was at 5.9 percent yesterday, down from more than 7 percent three months ago, according to a report by Bloomberg.

Meanwhile, BOE Governor Mervyn King and the nine-member Monetary Policy Committee left the bond-purchase target at 375 Billion Pounds; with economists pricing in an extension of the program when it ends next month. However, a slew of weak business surveys have highlighted the fragility of the latest recovery, and the scheme to get credit flowing has yet to prove its worth. Rising commodity costs are feeding price pressures, and policy maker Ben Broadbent has said the BOE’s capacity to add to quantitative easing is limited by faster-than-expected inflation.

Considering the outlook on both economies from yesterday’s policy decisions, trades are perceived to benefit the Euro currency. As such, a buy position is advised for the EUR/GBP. There is still the likelihood of technical price corrections however.

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