Outlook for GBP/EUR exchange rate is positive as we approach today's central bank decisions; GBP/EUR heads towards 1.18
Ahead of today's announcements we see the pound to euro exchange rate marginally down on Wednesday night's closing level at 1.1765. 1.18 is looming in the headlights for GBP-EUR and with the positive economic momentum behind sterling it is certainly looking achievable.
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This Bank of England meeting is Mervyn King’s last as Governor, with July’s taking place under the new governorship of Mark Carney.
King himself has been a steady voter for further QE over the past few months and we suspect that he and the other doves aboard the MPC will not sway from their course this month.
"They will, however, remain outvoted and we foresee no change in rates or asset purchases on Threadneedle St this lunchtime. The reason why? The data," says Jeremy Cook at currency brokerage WorldFirst.
Cook notes that yesterday’s services PMI data from the UK was the highest since January 2012 and gave the UK three out of three on the recent run of PMI numbers, providing an important boost for the valuable services industry.
"Jobs numbers were higher, prices lower and sales higher in what we hope will act as a bedrock for a recovery in the services industry through the summer. Retailers seem to be suggesting that the recent improvement in the weather will also improve prospects," says Cook showing just why investors are intent to stock up on sterling at present.
Likelihood of a Carney shock to sterling diminishes
"The combination of growth in manufacturing and services and increased activity in construction will give policymakers cause for confidence in the coming months. This should limit the Bank of England’s plans for further ‘monetary activism’ in the short-term," notes Cook.
Ross Walker at RBS tells us that the strong showing by the service sector is a 'dramatic development' for the UK economy:
"The key conclusion from the May services PMI survey is that these numbers bolster significantly the chances of solid services output growth in Q2.
"An acceleration in UK GDP in Q2 would be a dramatic development.
"There would be immediate monetary policy implications which would challenge expectations of radical 'monetary activism' by a Carney-led BoE.
"Even if the data only show a near-term improvement, it is hard to see how a Carney-led BoE would implement more radical monetary policy loosening against the backdrop of an acceleration in GDP to trend-like growth rates.
It now seems that, unless we see a very poor June, that the UK is likely to post two consecutive quarters of growth since Q2/Q3 of 2011.
"The surprise improvement was a rocket for GBP as it clattered through the 1.54 level in GBPUSD and towards 1.18 against the euro," says Cook.
The euro today: EUR faces a more lively ECB meeting
Turning to the euro part of the pound / euro exchange rate we note that the ECB meeting is likely to hold more surprises than that at the Bank of England.
Lloyds Bank Research say:
"The ECB’s announcement at 12.45 is similarly likely to result in no change in policy, yet attention will fall on the accompanying press conference. Modest improvements in recent surveys and hopes of a stabilisation in activity cannot dispel the feeling that the euro area requires more stimulus - particularly if the ECB balance sheet contracts further and/or the euro rises.
"However, recent commentary suggests the ECB is less likely to try and bolster SME lending directly. We will watch President Draghi’s conference for any hints of future stimulus."
However, the ultimate currency market driver comes tomorrow in the form of the monthly release of US Non-Farm Payrolls.
Markets will be paying more attention than normal to tomorrow's data - is the US recovery firmly on track? And when will the US Fed start easing back on its bond buying programme?
It is incredibly difficult to determine the impact of tomorrow's data on the US dollar, and by extension the euro which will in turn feed into the pound / euro exchange rate dynamic.
What is guaranteed is that we are headed for an interesting end to the week.