GBP/EUR: Will A More Dovish ECB Pull Euro Lower?

A better than expected performance in the UK service sector and political rumblings between Rome and Brussels helped boost the pound versus the euro on Wednesday. The pound euro exchange rate rallied to a peak to €1.1308.

What do these figures mean?
When measuring the value of a pair of currencies, one set equals 1 unit and the other shows the current equivalent. As the market moves, the amount will vary from minute to minute. If the euro amount increases in this pairing, it’s positive for the pound. Or, if you were looking at it the other way around:1 EUR = 0.87271 GBPIn this example, €1 is equivalent to approximately £0.87. This measures the euro’s worth versus the British pound. If the sterling number gets larger, it’s good news for the euro.

The dominant UK service sector performed better than analysts had been expecting in May. The service sector pmi increased to 51, up from 50.4 in April and ahead of the 50.6 that analysts had been expecting. After data earlier in the week showed that UK manufacturing and construction sectors slipped into contraction, investors breathed a sigh of relief over the service sector figures. Particularly given that the service sector accounts for around 80% of economic activity in the UK.

Yet despite service sector activity reaching a three-month high in May, the pace of expansion remains disappointing. Analysts expect the UK economy to remain close to stagnation in the second quarter amid Brexit and fears of a global economic downturn.

There is no high impacting economic data due for release today. Instead investors will be looking ahead to Friday, UK Prime Minister Theresa May’s last day as PM. Traders will prepare themselves for the Tory leadership battle which will continue until the end of July.

Euro Fragile Amid Brewing Rome — Brussels Tensions

In a rare occurrence for the eurozone, data was actually supportive of the euro on Wednesday. However, investors barely responded to the good news, instead fixated by developments between Rome and Brussels.

The European Commission took its first steps towards fining Italy over its growing debt pile on Wednesday. The two sides are gearing up for another battle over the Italy’s budget. The EC has started disciplinary proceedings which could lead to a €3.5 billion fine.

The EC also warned that weak economic growth in Italy means the GDP to debt ratio could reach 135% in 2020. The spiralling debt comes at a time when the Italian coalition government is close to collapse. The political instability comes at a time when the country needs stability to guide it out of this growing economic problem.

Today investors will look towards the European Central Bank monetary policy announcement. With consumer spending, manufacturing and inflation dropping lower market participants are expecting President Draghi to remain cautious on the eurozone outlook. Signs that the ECB is adopting a more dovish stance could send the euro lower.

Intes rate.

Why do raised interest rates boost a currency’s value?
Interest rates are key to understanding exchange rate movements. Those who have large sums of money to invest want the highest return on their investments. Higher interest rate environments tend to offer higher yields. So, if the interest rate or at least the interest rate expectation of a country is relatively higher compared to another, then it attracts more foreign capital investment. Large corporations and investors need local currency to invest. More local currency used then boosts the demand of that currency, pushing the value higher.

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