- EUR/GBP remains steady ahead of Tuesday’s critical German spending plan vote.
- The CDU/CSU bloc, led by election winner Friedrich Merz, is expected to secure the required two-thirds parliamentary majority.
- The Bank of England is expected to keep interest rates unchanged, aiming to balance sluggish economic growth with inflation risks.
EUR/GBP remains largely unchanged for the second consecutive session, hovering around 0.8410 during Asian trading hours on Tuesday. The currency cross maintains its position as the Euro remains stable from traders’ optimism ahead of the crucial German spending plan vote due later in the day.
The conservative CDU/CSU bloc, led by election winner Friedrich Merz, is expected to secure the two-thirds parliamentary majority needed to pass proposed reforms. These include exempting defense spending from debt limits and establishing a €500 billion infrastructure investment plan, which is likely to pass in both Germany's lower and upper houses.
On the monetary policy front, traders have scaled back expectations for European Central Bank (ECB) rate cuts this year, now pricing in only two reductions, likely in April and June. Additionally, interest rates are no longer expected to drop below 2%.
The EUR/GBP cross faces potential pressure as the Pound Sterling (GBP) strengthens on expectations that the Bank of England (BoE) will maintain its interest rates at Thursday’s policy meeting. The BoE’s cautious stance seeks to balance sluggish economic growth with persistent inflation risks.
In February, the central bank lowered rates to 4.5% and revised its 2025 growth forecast downward to 0.75%, citing concerns over tax increases and global trade uncertainties. Investors will closely watch the monetary policy statement and BoE Governor Andrew Bailey’s press conference for insights into the economic and monetary policy outlook.
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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