Markets look towards upcoming ECB rate decision

The Euro traded quietly on Wednesday as markets looked towards the European Central Bank's upcoming interest rate decision.

The European Central Bank is widely expected to implement its first 25bps interest rate cut, the future remains much less certain. There is a possibility that the ECB will cut interest rates once and may choose to provide hawkish forward guidance, indicating that further rate reductions are not currently planned.

Due to the anticipation surrounding the ECB’s interest rate decision on Thursday, the Euro struggled to find a clear direction on Wednesday.

The Euro may have been somewhat supported by the final services PMI reading for May. In the Eurozone, the service sector remained strong, with the index registering 53.2. Although this was a slight downward revision from the preliminary reading, it still indicated solid growth.

The Pound experienced lackluster trading on Wednesday, as the absence of significant data continued to dampen sentiment towards the currency. However, GBP exchange rates may have been under pressure due to the final UK services PMI, which reflected sector activity in May.

The index came in at 52.9, confirming a monthly slowdown in sector activity. Additionally, it indicated that service prices had continued to ease. This bolstered speculation that the Bank of England might cut interest rates in August, which could have limited Sterling's movement.

Beyond the European Central Bank's latest interest rate decision, the Euro may experience some movement following the release of the latest German factory orders data.

Thursday's forecast indicates a 0.3% increase in orders for April, an improvement over March's 0.4% decline. This potential uptick could bolster the Euro, signaling ongoing recovery in the German economy.

Yet, any potential gains could be countered by a decline in Eurozone retail sales. Forecasts suggest a 0.3% decrease in April, possibly weakening the EUR as it implies a slowdown in consumer spending across the bloc.

Friday will see the release of the latest German trade data. Forecasts suggest both the German trade surplus and export levels increased in April. This positive indication of healthy trade from the bloc's largest economy could bolster the EUR.

For the Pound, data releases are expected to be scarce until the end of the week's session, potentially constraining Sterling's attractiveness to investors. However, given the Pound's growing sensitivity to risk, a move towards risk-positive trading could potentially strengthen it against the safer Euro.

Conversely, if market sentiment turns negative, the Pound may face challenges in maintaining its strength against its safer counterparts.

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