- EUR/GBP holds its position ahead of PMI data from both economies.
- ECB President Lagarde indicated that the central bank is prepared to cut rates further if disinflation remains on track.
- The BoE is anticipated to take a cautious and gradual approach to easing monetary policy.
EUR/GBP moves sideways following two days of gains, trading around 0.8320 during the European hours on Monday. Traders are awaiting Purchasing Managers Index (PMI) data from both economies to gauge private business activities for both the manufacturing and services sectors.
On Monday, ECB President Christine Lagarde spoke at the Annual Economics Conference, indicating that the ECB is prepared to cut rates further if incoming data confirm that disinflation remains on track. Lagarde also signaled a shift in policy stance, noting that the previous bias toward maintaining "sufficiently restrictive" rates is no longer warranted.
The EUR/GBP cross gained ground as the Euro received support following President Emmanuel Macron's appointment of centrist ally François Bayrou as France's Prime Minister, raising hopes for political stability. Macron had pledged to swiftly select a new candidate after Michel Barnier was forced to resign following a confidence vote in Parliament.
Moreover, European Central Bank (ECB) Governing Council member Robert Holzmann said on Friday that cutting interest rates solely to stimulate the economy would be a mistake. According to Holzmann, the ECB’s primary responsibility is to ensure price stability, not to fuel economic growth. "Lowering rates now to boost the economy would contradict our current stance," he said, as reported by Bloomberg.
The upside of the EUR/GBP cross could be limited as the Pound Sterling (GBP) may appreciate due to the increased likelihood of the Bank of England (BoE) adopting a gradual pace of policy easing compared to other central banks in Europe and North America. The BoE and other forecasting bodies expect that inflation will rise next year in the wake of UK finance minister Rachel Reeves' big-spending budget. However, BoE Governor Andrew Bailey indicated four interest rate cuts in 2025, which could limit the upside of the British Pound (GBP) and support the EUR/GBP cross.
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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