- EUR/GBP loses ground as the Euro struggles amid more interest rate cuts by the ECB in the future.
- ECB reduced its Deposit Facility Rate by 25 basis points to 2.75%, with the Main Refinancing Operations Rate sliding to 2.9%.
- The BoE is expected to deliver a 25 basis point interest rate cut in February.
EUR/GBP offers its recent gains from the previous session, trading around 0.8360 during the Asian hours on Friday. The EUR/GBP cross depreciates as the Euro struggles amid increased expectations of further interest rate cuts by the European Central Bank (ECB).
On Thursday, the European Central Bank (ECB) decided to cut its Deposit Facility Rate by 25 basis points (bps) to 2.75%, with the Main Refinancing Operations Rate sliding to 2.9%, as expected. Traders had already priced in a 25-bps interest rate reduction on the assumption that inflationary pressures in the Eurozone are sustainably on track to return to the central bank’s target of 2%.
Moreover, the downbeat Eurozone GDP report contributes to the EUR’s downside. Preliminary data released by Eurostat on Thursday showed that the Eurozone economy flatlined in the fourth quarter (Q4) of 2024, following a 0.4% expansion in Q3. This reading came in weaker than the expectation of 0.1% growth. Market players will take more cues from a slew of Germany’s data including Retail Sales, Unemployment Rate, and Consumer Price Index (CPI) data, which will be released later on Friday.
The downside of the EUR/GBP cross may be limited as the Pound Sterling (GBP) remains under pressure amid expectations that the Bank of England (BoE) will resume its rate-cut cycle at next week’s policy meeting. The BoE is anticipated to lower interest rates by 25 basis points (bps) to 4.5% in February, marking its third cut since August, when borrowing costs peaked at 5.25%.
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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