- EUR/GBP comes under downward pressure as ECB plans to continue lowering borrowing costs next year.
- ECB Lagarde highlighted that the central bank could achieve its goal of reducing inflation to the 2% medium-term target.
- The Pound Sterling faces challenges due to rising odds of the BoE’s dovish policy outlook for the next year.
EUR/GBP halts its three-day winning streak, trading around 0.8290 during the early European hours on Tuesday. This downside of the EUR/GBP cross is attributed to the decline in the Euro amid rising bets of further rate reduction by the European Central Bank (ECB).
On Monday, Financial Times published an interview of European Central Bank (ECB) President Christine Lagarde, stating that the central bank is nearing its goal of sustainably bringing inflation down to the medium-term target of 2%. However, Lagarde stressed the importance of continued vigilance, particularly concerning inflation in the services sector.
Additionally, ECB Governing Council member Boris Vujcic stated on Saturday that the central bank plans to continue lowering borrowing costs in 2025, according to Bloomberg. “The direction is clear—it’s a continuation of the path from 2024, with further reductions in interest rates,” he said.
The EUR/GBP pair advanced as the Pound Sterling (GBP) weakened against its major counterparts, driven by increasing expectations of a dovish policy stance from the Bank of England (BoE) in the coming year. Market participants now anticipate a 53-basis-point (bps) rate cut in 2025, up from the previously expected 46 bps. This shift follows a 6-3 vote by the Monetary Policy Committee (MPC), with three out of nine members advocating for a 25 bps rate reduction, which investors interpreted as signaling a dovish trend for the year ahead.
Market expectations for 53 bps reduction in interest rates in 2025 suggest that there will be at least two 25-basis-points rate cuts. However, speculation for the number of interest rate cuts by the UK central bank is fewer than those expected from the European Central Bank (ECB), making the British Pound an attractive bet against the Euro.
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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