Pound Sterling to Euro (GBP/EUR) Exchange Rate firmer as Draghi makes deflation warning

The Euro was weaker against the Pound on Tuesday as the single currency was put under pressure by comments made by ECB President Mario Draghi and the election victory of a number of Eurosceptic parties.

Speaking on Monday at the European Central Bank’s new annual conference in Portugal, ECB President Mario Draghi said that the Central Bank saw a risk that a deflationary cycle is beginning to take hold in the Eurozone.

“There is a risk that disinflationary expectations take hold. We are not resigned to allowing inflation to remain too low for too long,” Draghi said.

Investors took his comments as a sure sign that the Central Bank will introduce new monetary stimulus measures at next month’s ECB policy meeting.

As a result the Euro slumped to a three-month low against the US Dollar.

Also weighing upon the Euro was the victory for Eurosceptic parties in the European elections.

Victories for UKIP in the UK, the National Front in France and Syriza in Greece showed that voters were dissatisfied with the running of the EU and spurred the regions leaders to call a summit to discuss the results.

Anger against austerity and immigration was the main focus for voter anger.

Concerns over fresh violence in Ukraine have also put pressure upon the single currency.

In the eastern Ukrainian city of Donetsk the national army is battling pro-Russian separatists.

According to news reports up to 35 separatist fighters have been killed in heavy fighting around the city’s airport.

The latest assault comes after new Ukrainian President Petro Poroshenko vowed that “anti- terrorist operations would last days not months.”

The Pound meanwhile found support from a report released by the Confederation of British Industry which showed that the UK’s services companies are at their most optimistic since 1998. The service sector makes up 75% of the UK economy.

Britain is growing faster than any other G7 economy and the Bank of England is watching closely for signs of inflationary pressure coming from the labour market. So far, wages are growing at close to the rate of inflation but are expected to pick up more strongly later this year.

The Euro is likely to see movement on Wednesday due to the release of consumer, business and industrial confidence data. The latest German unemployment data is also due for release.

Euro Exchange Rates