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Contributors Cameron’s Veto at EU Summit Helps Euro More than Pound

Andrei Knight, Sr. Currency Strategist,

UK’s Prime Minister David Cameron exercised his veto power over the proposed new EU treaty at Friday’s EU summit, in part to protect the City from over 20 new financial regulations including a financial transaction tax and reforms of short-selling rules and hedge fund operations.  (Naturally, the other part being to boost his popularity within his own party and a disgruntled public.)

While many have speculated that this marks the beginning of the UK’s departure from the EU, it is actually not much different from the island nation’s stance when the Euro first came into being a decade ago.  The UK is all for free trade and free travel, things which benefit its own economy, but just like they wanted no part of the unified currency, preferring to keep their prized Pound Sterling, we cannot blame them for not being eager to shoulder other countries’ debt or the regulatory burdens arising from it.

One would think that such a move would result in the Pound gaining against the Euro, but since Friday we’ve seen quite the opposite.  The reality as the markets perceive it is that while Europe may struggle but would eventually learn to get by without the UK, the UK is rather dependent upon its largest trading partner across the English Channel.

The next key test for EUR/GBP is 0.8476 – if this level continues to hold as support, look for a retracement backup  to the Daily 21 EMA near 0.8559; if, on the other hand, 0.8476 breaks and re-tests from underneath as resistance, we could see the current downtrend reach as low as 0.8258.

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