- EUR/GBP breaks its four-day losing streak due to dovish comments from BoE Governor Andrew Bailey.
- BoE’s Bailey believes that inflation outlook is downwards, suggesting the interest rates path will also be downwards, gradually.
- German Business Climate Index declined to 85.4 in September, against August’s 86.6 and expected 86.0 readings.
EUR/GBP breaks its four-day losing streak, trading around 0.8330 during the European hours on Tuesday. This upside of the EUR/GBP cross could be attributed to the dovish comments from the Bank of England (BoE) Governor Andrew Bailey.
BoE Governor Andrew Bailey said, “I'm very encouraged that the path of inflation is downwards therefore I do think the path for interest rates will be downwards, gradually.” Bailey added, “My best guess will be interest rates settle at a 'neutral rate'.”
UK Prime Minister Keir Starmer is expected to warn of a "shared struggle" ahead but will emphasize that there is "light at the end of the tunnel" for the country during his first speech at the Labour Party conference. Starmer will state that "tough" decisions are necessary now to "build a new Britain," per BBC.
On the data front, Germany’s headline IFO Business Climate Index declined to 85.4 in September, down from 86.6 in August, missing market expectations of 86.0. The Current Economic Assessment Index also fell to 84.4, below the forecasted 86.1, compared to 86.4 in the previous month. Meanwhile, the IFO Expectations Index, which reflects firms' outlook for the next six months, dropped to 86.3 in September, in line with expectations, from 86.8 in August.
Monday’s flash HCOB Purchasing Managers Index (PMI) data for September from the Eurozone and Germany has heightened market expectations that the European Central Bank (ECB) may implement a second consecutive interest rate cut at its October meeting.
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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