- EUR/GBP faces challenges as traders expect the ECB to deliver another rate cut in December.
- ECB policymakers have started discussing whether interest rates may need to fall below the neutral level.
- The BoE may deliver more rate cuts in November and December.
EUR/GBP remains subdued near 0.8310 during European trading hours on Wednesday, following losses in the previous session. The Euro is facing pressure as money markets have raised their expectations for further European Central Bank (ECB) rate cuts. This shift comes after improvements in inflation control but growing concerns about the Eurozone’s economic outlook.
The ECB has already cut its Deposit Facility Rate three times this year, with another reduction widely expected at the December meeting. Remarks from ECB President Christine Lagarde were seen as indicating a weaker economic outlook, prompting markets to anticipate a 25-basis point cut at each meeting through mid-2025.
According to sources familiar with the discussions, Reuters reported on Wednesday that European Central Bank (ECB) policymakers have begun debating whether interest rates will need to drop below the neutral level during the current easing cycle. One source noted, "I think neutral is not enough," implying that the ECB may aim for significantly lower rates in the coming months.
The Pound Sterling (GBP) encountered challenges following declining consumer and producer inflation rates, along with weak labor market data in the United Kingdom (UK). These conditions are driving expectations that the Bank of England (BoE) might introduce a 25 basis point rate cut in November, followed by another in December.
On Tuesday, BoE Governor Andrew Bailey emphasized the need for the UK central bank to strengthen its oversight of the less transparent non-banking sector. Speaking at a Bloomberg event in New York, Bailey remarked, "We are nearing a point where we must shift focus from rule-making to surveillance" to better monitor financial activities outside traditional banking.
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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