EUR/GBP: ECB Lowers Euro Zone’s Growth and Inflation Forecasts; UK’s Trade Deficit Widens

Yesterday, the European Central Bank (ECB) left its Minimum Bid Rate unchanged at 0.75 percent, but the Euro dropped in the previous European trades as the central bank lowered its growth and inflation forecasts for the economy, leaving the door open for possible rate cuts in the future. The Great British pound on the other hand gained as the Bank of England (BOE) kept its asset purchase program at 375 Billion Pounds, and its Official Bank Rate at 0.50 percent.

In today’s European session, bearish trades are foreseen for the EURGBP pair as continued weakness of the region’s economy is seen to trigger the ECB to cut interest rates in the future. Yesterday, ECB President Mario Draghi left interest rates unchanged but lowered its growth and inflation forecasts, saying that economic weakness is to extend until the second half of next year, and that recovery is likely by the second party of 2013. Draghi’s remarks are seen to cause a Euro sell-off in the markets, as his statements were perceived as hints to cut interest rates in the coming months to shore up the ailing economy. “We’ve already done much that is needed,” he said at a news conference after the interest rate decision, raising speculations that the central bank is done with efforts to rescue the economy of the currency union. As downside risks remain, the single currency is projected to extend declines.

The economic situation in the UK is likewise not encouraging as its trade deficit was reported yesterday to have widened to 9.5 Billion Pounds in September as exports suffered from weakness in the Euro Zone. Because of the economy’s poor performance the Office for Budget Responsibility cut its forecast to -0.1 percent from its initial growth estimate of 0.8 percent in March. But given that the Sterling is considered a better choice than the shared currency in times of economic uncertainties, the former is seen to gain in today’s European session. Thus, a sell bias for the EURGBP pair is recommended.

Aviv N. Shapiro is a Senior Research Analyst and Business Development Officer for AlgosysFx.