- EUR/GBP rose to a three-month high of 0.8623 marked on Thursday.
- The Pound Sterling may struggle due to the rising odds of a BoE rate cut in August.
- ECB policymaker Olli Rehn stated that the central bank could consider further rate cuts if inflation continues to slow.
EUR/GBP edges higher to three-month highs, trading around 0.8610 during the Asian hours on Thursday. The EUR/GBP cross receives support due to the rising expectations of the Bank of England (BoE) delivering a 25-basis point rate cut at its August meeting. Additionally, market expectations now include the possibility of two more quarter-point rate cuts by the BoE by December.
The Royal Institution of Chartered Surveyors (RICS) released the housing costs in the United Kingdom (UK). RICS Housing Price Balance posted a reading of -19% in July, as compared to the previous reading of -17%, the lowest since December last year.
On the Euro front, traders await the release of Germany's Harmonized Index of Consumer Prices (HICP) by the German statistics office Destatis on Friday. Market expectations are steady, with forecasts of a 2.6% year-on-year increase and a 0.5% month-on-month rise.
On Tuesday, Eurozone Retail Sales declined by 0.3% month-over-month in June, exceeding market expectations of a 0.1% decrease. On a yearly basis, retail sales also fell by 0.3%, compared to a 0.1% expected increase and a 0.5% increase previously.
The European Central Bank (ECB) policymaker Olli Rehn said on Wednesday that the central bank can continue cutting interest rates if there is confidence among policymakers that the inflation trend is slowing in the near future. The central bank left interest rates on hold at its July meeting. Rehn said "Inflation continues to slow down but the path to the two percent target remains bumpy this year," per Reuters.
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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