EUR/GBP: Euro Poised for a Weekly Drop on ECB Verbal Intervention and EU Budget Cuts

Yesterday, European Central Bank President Mario Draghi caused the Euro’s biggest drop in seven months, and is poised to end in a steep weekly loss opposite the British pound as exchanges come to a close. In a signal that further interest-rate cuts from the ECB remain a possibility, investors opt for a Euro selloff, not to mention the first-ever cuts in the bloc’s budget, as European Union leaders bow to UK Prime Minister David Cameron’s insistence on thrift at the EU level.

The ECB chief said that economic activity in the Euro Zone would remain weak in early 2013 before recovering later in the year. Danske Bank economists wrote in a research note that Draghi “managed to dampen recent de facto tightening without taking any action, much as was the case with the OMT program, which has so far managed to lower Spanish and Italian bond yields without buying a single bond.” True enough, his pledge in July to buy government bonds precipitated a sea-change in sentiment that helped to shore up the 17-nation Euro-area economy, even with the ECB yet to spend a cent in its so-called Outright Monetary Transactions program.

“Mr Draghi pulled off quite a feat at [Thursday’s] ECB press conference: he managed to talk down the euro while talking up the euro zone,” Nicholas Spiro, managing director at Spiro Sovereign Strategy said in a note.

Moreover, following an all-night bargaining session at the EU headquarters in Brussels, the leaders reassembled to consider a 2014-2020 spending ceiling of 960 Billion Euros, down from an original proposal of 1.047 Trillion Euros and less than the 994 Billion Euros spent in the current budget cycle. David Cameron has focused exclusively on payments throughout the negotiations, in part because they are always smaller than the headline ceiling of budget commitments that are the standard measure used by other governments. The hope was that widening the gap between the two figures would deliver the smallest possible number for Cameron to sell to British voters, who are increasingly skeptical of the benefits of EU membership.

Considering the effects of these fundamental news on the trades today, a short position is suggested for the EURGBP. It would be wise to keep watch for probable technical price corrections.

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