EUR/GBP: Euro Gains as EU Officials Reach Breakthroughs

The Euro is perceived to maintain its incline alongside the Pound today as major breakthroughs in resolving the three-year-old debt crisis were achieved by European officials, managing to improve market sentiment. Essential gauges of the Euro Zone economy up for release today are likely to suggest that the region’s economy has already seen the worst. Meanwhile, Standard & Poor’s move to put the UK’s triple-A rating on a negative outlook is believed to weigh on the Sterling.

After weeks of wrangling and tough talks, Greece will finally be able to receive the latest tranche of bailout funds needed to keep the country going. Yesterday, finance ministers agreed to release 49.1 Billion Euros of funds, with 34.3 Billion Euros of the amount set to be awarded in the coming days. Greece managed to complete a buyback of its debt this week, essentially sealing the release of the funds. The Eurogroup expressed confidence that continued fiscal and structural reforms will allow the Greek economy to return to a sustainable growth path.

Meanwhile, European Union finance ministers reached a landmark deal yesterday that would bring many of the continent’s banks under a single supervisor, a move governments hope will be a major step toward resolving the debt crisis. The ministers said the ECB would start policing the most important and vulnerable banks in the Euro Zone and other countries that choose to join the new regime next year. As soon as it takes over, the ECB will be able to force banks to raise their capital buffers and shut down unsafe lenders. With the deal, the bloc has cleared the first hurdle to a banking union, designed to cut the link between weak banks and their governments.

Today, optimism is set to continue as slight improvements in the Manufacturing and Service PMI gauges for December are expected. Although still in contraction, the French Manufacturing PMI is estimated to rise from 44.5 points to 44.9 points while the German Manufacturing PMI is projected to climb from 46.8 points to 47.1 points. The services sector in Germany is also advancing, with its Services PMI deemed to print 50.0 points from 49.7 in November. On views that the Euro Zone economy is slowly recuperating, the single currency is believed to rise.

Meanwhile, the UK’s prized credit rating has suffered another blow after the S&P became the third major agency to downgrade the outlook to “negative.” S&P said that change means there is a one-in-three likelihood of a credit rating downgrade in the next two years. The move reflects the weak recovery in Britain and sharply rising national debt levels. As a result, many economists now believe the UK will lose its top rating, with one of the three agencies expected to move in 2013. Considering these, a long position is recommended for the EUR/GBP trades today.

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