- EUR/GBP depreciates amid the increased likelihood of the ECB delivering 25 basis points on Thursday.
- The Pound Sterling may depreciate as traders expect the BoE to reduce interest rates by 25 basis points in February.
- UK PM Starmer emphasized that economic growth is his top priority, highlighting signs that the economy is starting to recover.
EUR/GBP extends its losing streak for the fifth successive session, trading around 0.8380 during the early European hours on Wednesday. Further downside risks for the EUR/GBP cross seem possible as the Euro (EUR) could weaken due to the increased likelihood that the European Central Bank (ECB) will lower its Deposit Facility rate by 25 basis points (bps) to 2.75% on Thursday. This expectation stems from the sluggish economic outlook in the Eurozone and confidence that inflation will sustainably return to the ECB’s 2% target.
With a 25 bps rate cut already priced in, investors will closely monitor President Christine Lagarde’s press conference for insights on how potential tariffs from Trump might influence economic and monetary policy.
However, this downside of the EUR/GBP cross could be limited as the Pound Sterling (GBP) remains under pressure amid rising concerns over the risk of stagflation in the UK economy, driven by weakening labor demand and persistent inflation.
Traders are currently pricing in a 25 basis point (bps) rate cut in the Bank of England’s (BoE) first monetary policy decision of 2025 on February 6, which would bring borrowing rates down to 4.5% amid the sluggish economic outlook.
On Tuesday, UK Prime Minister Keir Starmer gave optimistic remarks on the economy in a Bloomberg interview. Starmer emphasized that the Labour government’s top priority is "growth" and noted that the economy is beginning to "turn around." He also highlighted the strong trade ties between the United States (US) and the UK, stating that "we’ve got a huge amount of trade with the United States already, and the base is there for even better trading relations. We need to build on that."
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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