- EUR/GBP depreciates due to rising odds for the ECB’s interest rate cut in October.
- UK GDP rose by 0.5% QoQ in Q2, slightly below the expected and previous increase of 0.6%.
- The Pound Sterling is buoyed by expectations that the BoE will likely take a slower approach to rate cuts.
EUR/GBP retraces its recent gains from the previous session, trading around 0.8340 during the Asian hours on Monday. The currency cross remians tepid following the release of the Gross Domestic Product (GDP) data for the second quater from the United Kingdom (UK).
The UK Gross Domestic Product (GDP) grew by 0.5% quarter-over-quarter in the second quarter, slightly below the expected and previous increase of 0.6%. On an annual basis, GDP rose by 0.7%, also falling short of the forecasted and prior growth rate of 0.9%.
The EUR/GBP cross recieved downward pressure from the increasing odds of the European Central Bank (ECB) implementing another interest rate cut in October. Traders would likely observe a slew of economic releases from Germany scheduled to be released later in the day, including preliminary Consumer Price Index (CPI) data for September.
Additionally, lower-than-expected inflation in France and Spain has reinforced the likelihood of the third cut in the ECB's ongoing policy-easing cycle, which began in June. The ECB resumed cutting rates in September after holding them steady in July.
France's inflation grew by 1.5% year-over-year in September, significantly below the estimated 1.9% and down from the previous release of 2.2%. On a monthly basis, price pressures deflated at a sharp rate of 1.2%, exceeding expectations of a 0.8% decline. In Spain, the annual Harmonized Index of Consumer Prices (HICP) increased by 1.7% in September, lower than the forecasted 1.9% and a drop from August’s 2.4%. Month-on-month, the HICP fell by 0.1%, contrary to expectations for no change.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.
Recommended content
Editors’ Picks
GBP/USD extends recovery toward 1.2950 ahead of BoE policy decision
GBP/USD builds its recovery momentum toward 1.2950 in the European morning on Thursday, moving away from its lowest level since mid-August. Traders adjust their positions ahead of the key BoE and Fed monetary policy announcements.
EUR/USD stays firm near 1.0750 amid US Dollar pullback
EUR/USD holds higher ground near 1.0750 in the European session on Thursday. The pair finds fresh support from a broad US Dollar retreat, as traders unwind their Trunp win-inspired USD longs ahead of all-important Fed policy announcements.
Gold: Will Fed Chair Powell rescue XAU/USD?
Gold price is seeing a dead cat bounce from three-week lows of $2,644 in Asian trading on Thursday, as the dust settles in the aftermath of a massive sell-off, fuelled by Republican candidate Donald Trump’s victory in the US presidential race.
BoE set for a second interest rate cut this year on Thursday
Market consensus points to further easing by the Bank of England's (BoE) upcoming interest rate decision on Thursday. The BoE has held rates steady at 5.00% in the previous gathering, but shifting investor sentiment now suggests a possible 25-basis-point cut this week.
Trump wins: Tax cuts come with a cost
Donald Trump’s victory will ensure a lower tax environment that should boost sentiment and spending in the near term. However, promised tariffs, immigration controls and higher borrowing costs will increasingly become headwinds through his presidential term.
Best Forex Brokers with Low Spreads
VERIFIED Low spreads are crucial for reducing trading costs. Explore top Forex brokers offering competitive spreads and high leverage. Compare options for EUR/USD, GBP/USD, USD/JPY, and Gold.