EUR/GBP: Euro Gains from Spanish Regional Assembly

Gains are forecast to be had by the Euro today against the British pound in spite of a technical resistance at the 0.8144 price mark. EU leaders took a step forward on the path toward a banking union in the recently concluded economic summit.

The fiscal heads are adamant on a legislative framework to be in place by 1 January next year, with the body starting work later in 2013. The legislation would give the European Central Bank the ability to oversee the region’s roughly 6,000 banks. This would be in addition to its existing mandate to manage interest rates and contain inflation. The establishment of a single banking supervisor is a prerequisite for the ultimate goal of recapitalizing banks in the single currency region with bailout funds from the European Stability Mechanism.

In theory, the ESM would be able to inject capital directly into banks without driving governments deeper into debt. This is particularly important for Spain, which has already requested up to €100 Billion to help fill the €59 Billion hole left in the nation’s banking sector by a major property bust.

With market focus settled on Madrid and when Prime Minister Mariano Rajoy would eventually seek for a bailout for the indebted country, recent developments in the political arena are seen to boost the prospects of the single currency.

An extension of the Rajoy majority in the stronghold region of Galicia offered some respite to the 10-month-old government. This, in effect, removes an obstacle to a European bailout. His PP won 41 of the 75 seats in the regional assembly, allowing it to extend its majority in the northwestern region as the Socialists lost almost half of their votes and a new leftist group took nine seats. Such developments provide Rajoy enough leeway to decide whether to seek a bailout.

Meanwhile, the Sterling reached a four-month low opposite the single currency, as minutes of the Bank of England’s October meeting showed that policy makers were split on the need for more stimulus to boost the UK economy.

Putting these economic news into consideration, the prospects of the Euro currency are perceived to benefit. As such, a buy bias is deemed for the EUR/GBP. Be cautious though of price corrections as these are still likely to occur.

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