- EUR/GBP faces challenges as traders expect the ECB to deliver a rate cut in December.
- The European Commission forecasts 0.8% growth for the Euro Area in 2024, maintaining its projection from the Spring estimate.
- UK Economist Ruth Gregory expects that the BoE will hold interest rates steady at 4.75% in December.
EUR/GBP remains stable near 0.8350 during early European trading hours on Monday. The EUR/GBP cross faces headwinds as the Euro remains under pressure due to the European Central Bank's (ECB) dovish outlook, with a policy rate cut anticipated at its December meeting.
In its Autumn 2024 forecast, the European Commission predicts 0.8% growth for the Euro Area in 2024, unchanged from its Spring estimate. However, the growth projection for 2025 has been slightly lowered to 1.3% from 1.4%, while the Eurozone economy is expected to expand by 1.6% in 2026.
Commenting on the outlook, EU Economy Commissioner Paolo Gentiloni remarked, "As inflation continues to ease and growth in private consumption and investment gains momentum, coupled with record-low unemployment, growth is expected to gradually accelerate over the next two years."
The UK economy expanded by 0.1% quarter-on-quarter in the three months ending September, slowing from the 0.5% growth seen in Q2 and missing market expectations of a 0.2% increase. Year-on-year, UK GDP grew by 1.0% in Q3, aligning with forecasts and improving on the 0.7% growth recorded in Q2. On a monthly basis, GDP contracted by 0.1% in September, reversing a 0.2% gain in August.
Capital Economics’ Deputy Chief UK Economist Ruth Gregory reiterated their expectation that the Bank of England (BoE) will maintain rates at 4.75% in December, with a 25-basis-point rate cut anticipated in February.
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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