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EUR/GBP Tumbles, Eyes 2012 Lows

H.S. Borji
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EUR/GBP Tumbles, Eyes 2012 Lows

The euro continued to soften against the British pound on Thursday, as European Central Bank President Mario Draghi reiterated his commitment to economic stimulus amid expectations for modest Eurozone growth in the second half of the year.

The EURGBP tumbled 0.36 percent to 0.7793, easing off an intraday low of 0.7785. The pair, which has declined 0.9 percent since Monday, is trading below the 100-day simple moving average. Initial support is likely found at 0.7788. On the upside, resistance is ascending from 0.7845.

The EURGBP has weakened gradually throughout the course of 2014, despite a sharp retracement for the British pound in recent months. The pair has tumbled 7.1 percent over the last six months, as weak Eurozone growth and geopolitical uncertainties continue to weigh on the common currency. Analysts foresee further declines in the short-term, as the pair looks poised to test the lows from 2012.

The euro was under pressure on Thursday after ECB President Mario Draghi said Eurozone growth will remain subdued in the second half of the year.

Speaking to Verslo Zinios, a leading Lithuanian business daily, Draghi expressed concerns that escalating geopolitical tensions between Russia and the West could further dampen business and consumer confidence in the Eurozone. Draghi reaffirmed the central bank’s commitment to monetary stimulus, vying to do whatever it takes to get the Eurozone growth engine back on track.

Draghi was in Lithuania to deliver a keynote speech about the benefits of Eurozone accession. Lithuania is the latest country to join the Eurozone. The country is expected to adopt the euro on January 1, 2015.

The benefits of Eurozone accession are a controversial matter, as the markets have grown deeply skeptical about the economic viability of the 18-nation currency bloc.

The Eurozone economy stagnated in the second quarter, as the region’s star economy contracted for the first time since 2013. Germany, which accounts for about one-third of Eurozone GDP, saw its economy contract 0.2 percent in the June quarter.

Meanwhile, European markets were under pressure after Bank of England Governor Mark Carney said the central bank was warming to the idea of a rate hike.

“With many of the conditions for the economy to normalize now met, the point at which interest rates also begin to normalize is getting closer,” Carney said in a speech to the Institute and Faculty of Actuaries General Insurance Conference in Wales. “In recent months the judgment about precisely when to raise Bank Rate has become more balanced.”

The BOE voted to leave the Bank Rate at 0.5 percent at the September 4 policy meetings. The minutes of those meetings, which were released last week, showed a 7-2 divide on interest rates. Committee members Martin Weale and Ian McCafferty voted in favour of raising interest rates for the second consecutive month.

Weale and McCafferty believe the current economic situation warrants an immediate rate hike of 25 basis points. According to the Committee members, an improving jobs market will serve as a catalyst for higher wage growth in the near future.

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