EUR/GBP edges higher to near 0.8400 due to diminished expectations of ECB rate cuts
|- EUR/GBP rebounds from 0.8386, the lowest level since August 2022.
- ECB’s Lagarde suggested being mindful that the growth outlook remains uncertain.
- The British Pound could limit its losses as investors view UK markets more attractive investment destination.
EUR/GBP halts its losing streak, trading around 0.8400 during the European hours on Monday. The Euro may find support as expectations for further rate cuts by the European Central Bank (ECB) diminish. Investors foresee inflation pressures remaining steady through 2024.
ECB President Christine Lagarde highlighted a cautious stance this month, stating, “The strong labour market means that we can take time to gather new information, but we also need to be mindful of the fact that the growth outlook remains uncertain.”
On the other hand, the British Pound (GBP) could limit its losses as investors view the United Kingdom (UK) markets as a more attractive investment destination compared to the European Union, which faces political uncertainties. The decisive victory of Keir Starmer’s Labour Party has assured stable fiscal policies and smooth ministerial appointments.
The UK's new Chancellor, Rachel Reeves, has pledged to stimulate growth and investment, focusing on the supply side due to limited government spending capacity. This pledge comes amid deepening uncertainty over the timeframe for Bank of England (BoE) rate cuts, which has been a significant factor in GBP’s strength. Traders anticipate the BoE to start lowering interest rates at the August meeting.
Traders will assess Eurozone industrial production numbers for May on Monday, which can provide additional insights into European Central Bank policy. On the UK front, Office for National Statistics (ONS) will publish the inflation and employment data later in the week.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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