Euro Receives Support from Monti’s Comments

EUR/GBP Fundamental Analysis

The Euro is believed to pare back some of its losses opposite the British pound today as market fears were soothed over Italy’s latest political turmoil. Italian Prime Minister Mario Monti played down market concerns over his intention to resign, saying there was no danger of a vacuum ahead of an election in the spring. Slight improvements in both the German ZEW Economic Sentiment and the ZEW Economic Sentiment reports for December are likewise seen to support the single currency.

At a press conference in Oslo yesterday, Mario Monti said investors should not expect the imminent end of his government to lead to a political vacuum that will fuel market turmoil in Italy. He further said that the market reaction will be contained and expressed confidence that the election will give room to a government that will be highly responsible and EU-oriented, in line with the huge efforts already pursued by Italy. Monti announced last Saturday that he plans to resign after the approval of Italy’s 2013 budget, paving the way for earlier national elections. Political uncertainty unsettled the markets by sparking a selloff in Italian bonds, but Monti’s comments managed to alleviate concerns.

Meanwhile, in crisis-fighting measures, Euro Zone finance ministers are slated to discuss the outcome of the Greek bond buy-back in a teleconference late today. Last week, Greece offered to buy back bonds held by private investors at a deep discount to their nominal value, to reduce its debt pile and make public finances sustainable. By last Friday, Athens received offers for 26.5 Billion Euros worth of bonds and extended the deadline until today to attract additional offers and reach a target of around 30 Billion Euros. The success of the buy-back is a condition for the International Monetary Fund to participate in the revised Greek program of reforms and emergency financing. Euro Zone officials have previously hinted that they would give the green light for their part of the loans on Thursday even if the buyback was not a complete success.

On the economic front, an expected uptick in investor sentiment in Germany is seen to slightly ease concerns over the Euro Zone economy. The German ZEW Economic Sentiment is estimated to improve from -15.7 points to -11.4 points in December, potentially its best reading in seven months. Meanwhile, the ZEW Economic Sentiment for the whole bloc is seen to cross into the positive for the first time in eight months. The index is set to rise from -2.6 points to a grade of 0.1 this month. Considering these, a long position is recommended for the EUR/GBP today.

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