EUR/GBP: Sterling Setting Up for Gains

The British pound looks to step in some gains over the Euro today as the single currency faces uncertainties in the economic front. On the other hand, the Sterling looks on track to rise as a report this week is bound to show that the British economy finds itself out of a technical recession.

In just about a week after upholding Spain’s credit-rating to below investment grade, Moody’s Investors Service reduced the credit-ratings of Catalonia and four other Spanish regions. According to a statement dated yesterday, the ratings firm stated that Catalonia was reduced two steps to Ba3 from Ba1; Extremadura was lowered to Ba1 from Baa3; Andalucia was slashed to Ba2 from Baa3; and Castilla-La Mancha was cut to Ba3 from Ba2, while Murcia dropped to Ba3 from Ba1. The decision was “driven by the deterioration in their liquidity positions, as evidenced by their very limited cash reserves as of September 2012 and their significant reliance on short-term credit lines to fund operating needs,” the ratings firm said.

Moreover, the 500 Billion-Euro European Stability Mechanism faces yet another test after a complaint by Thomas Pringle, an independent member of the Irish parliament, has reached the Luxembourg-based EU Court of Justice. The European Union’s highest court weighs claims that the firewall violates EU law and should be banned in its current form. A hearing is scheduled for today, with a ruling possible as soon as the end of the year under a fast- track procedure.

In addition, former executive board member of the European Central Bank, Juergen Stark, told CNBC that the European Central Bank has “crossed red lines” by overstepping its monetary policy remit and operating in the realms of fiscal policy and politics. Stark said the ECB should not be enacting programs such as its latest bond-buying scheme, called the OMT (Outright Monetary Transactions), with the aim of helping governments refinance their debt, as high yields on Italian and Spanish bonds are an accurate reflection of the countries’ sovereign risk.

Meanwhile, the Sterling is set to recover against the Euro on speculation that the double-dip recession will be officially declared over this week. The Office for National Statistics reveals that the economy grew by around 0.6 percent in the three months ending September. Amid the underlying state of the economy remaining weak, a positive GDP will end nine months of contraction in which the economy shrank by 1.1 percent as the austerity measures, high inflation and the Euro Zone crisis took their toll.

Given these economic fundamentals, a short position is recommended for the EUR/GBP. Be cautious though of price corrections as these are still likely to occur.

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