EUR/GBP: Renewed Euro Zone Fears to Send the EURGBP Lower

The disappointing Spanish auction and economic figures led to the decline of the Euro versus the Great British pound in yesterday’s European trading exchanges. Optimism that Greece would be able to reduce its debt after it announced its bond buyback plan, likewise waned as the indebted country suffered a downgrade from Standard & Poor’s (S&P). However, the single currency pared its losses after Chancellor of the Exchequer George Osborne delivered his budget to parliament, revealing that austerity measures are to extend until 2018.

Markets’ uneasiness returned after Spain held a 10-year bond auction, as the government failed to meet the maximum sales target. The country was only able to sell 4.25 Billion Euros worth of debt, less than the 4.50 Billion target. Although the sale came out a bit disappointing, bond yields dropped to 5.29 percent, from the previous auction’s 5.52 percent. Meanwhile, Greece received a downgrade from S&P, after the former offered to buy back bonds worth 10 Billion Euros from private holders. The country’s credit rating was lowered to selective default, with S&P saying that Greece’s buyback move is tantamount to a default. After the completion of buyback, S&P said that it could raise the long-term credit rating back to CCC. The outlook for the Euro Zone economy has weakened after disappointing economic data came out and today, the bearish picture is likely to be the same should European Central Bank (ECB) Mario Draghi indicate a tendency to further ease monetary policy.

In the UK, extended tax increases and spending cuts are expected until 2018, due to its sluggish economic growth. As a result of Britain’s failure to meet its target, Fitch ratings agency warns that it could lose its AAA credit rating. Despite the UK’s slow economic recovery, the Pound is likely to find support as the Bank of England (BOE) is expected to refrain from expanding QE. Thus, a short position is suggested for the EURGBP pair in today’s European trades.