EUR/GBP: EU Summit Breakthroughs to Bolster the Euro

The Euro is foreseen to continue its gains opposite the British pound as sources reveal that European leaders are taking a positive leap toward establishing a single banking supervisor for the Euro region. According to reports, a French government source said that leaders are moving closer to striking a deal under which the bloc’s rescue fund could begin recapitalizing struggling banks next year.

The legislation focuses on improving supervision of banks in the Euro area by putting them under the guidance of the European Central Bank. Forging an effective banking union is regarded by the International Monetary Fund and most analysts as a vital step to overcome the three-year-old debt crisis hounding the Euro Zone. The agreement is believed to mean that the European Stability Mechanism could start injecting capital into troubled banks as early as the first quarter of 2013. Another source said that the ECB would be in charge of supervising systemically important banks and could oversee others if necessary. The point when the ECB will become the region’s banking supervisor would open the way for the bailout fund to inject capital directly into troubled banks without adding to the governments’ debt pile.

The reported deal came after the leaders of France and Germany held a private meeting following a public clash over greater EU control of national budgets. Germany remains reluctant to see its savings and cooperative banks come under outside supervision. At a news conference, German Chancellor Angela Merkel refused to give a precise start date for the system nor for the direct recapitalization of banks. In contrast, the French government and the European Commission have called to hasten the legislation. Despite the disagreement, the leaders seemingly compromised, with officials stating that an agreement on a political framework for the end of 2012 and a gradual implementation in 2013 is expected. French President Francois Hollande even said that the worst is over, likely seeking to reassure investors that Europe is keeping up momentum to emerge from its financial crisis.

Meanwhile, another factor supporting the single currency is Greece. In a statement released earlier today, Euro area leaders welcomed the determination of the Greek government to deliver on its commitments, citing that good progress has been made to bring the adjustment program back on track. With the praise, investors deem that the Greek government moved closer to securing the next aid payout Greece needs urgently. Considering such optimism, a long position is recommended favoring the Euro today.

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