EUR/GBP drops to near 0.8400, awaits Eurozone HICP for August
- EUR/GBP extends its losing streak due to hawkish sentiment surrounding the BoE maintaining higher rates for a longer.
- BoE Governor Bailey also advised against hastening additional rate cuts at the Jackson Hole Symposium last week.
- The cooled-off inflation in Germany and Spain has fueled expectations of a rate cut by the European Central Bank.
EUR/GBP continues its losing streak for the eighth consecutive session, trading around 0.8410 during the early European hours on Friday. The EUR/GBP cross may extend its decline as the Pound Sterling (GBP) receives support from hawkish sentiment surrounding the Bank of England (BoE) maintaining higher interest rates for a longer period compared to the European Central Bank (ECB).
At the Jackson Hole Symposium last week, BoE Governor Andrew Bailey stated that the second-round effects of inflationary pressures would be less significant than anticipated. However, Bailey also advised against hastening additional interest rate cuts, according to Reuters. The BoE reduced rates by 25 basis points to 5% on August 1, and money markets are pricing in an additional 40 basis points of cuts by the end of the year.
In August, UK Nationwide Housing Prices experienced a 2.4% year-on-year increase, up from 2.1% in July. This marked the sixth consecutive period of rising house prices and the strongest growth since December 2022. However, on a monthly basis, house prices declined by 0.2%, following a 0.3% increase in July, defying market expectations of a 0.3% rise.
In the Eurozone, Consumer Price Index (CPI) data from Germany and Spain indicated that inflation cooled further in August. This development has fueled expectations of an interest rate cut by the European Central Bank (ECB), weakening the Euro and undermining the EUR/GBP cross.
Carsten Brzeski, ING’s global head of macroeconomics, described the outcome as "great news for the ECB," noting that a slowing economy and cooling inflation create a "perfect macro backdrop" for lower interest rates. However, Brzeski cautioned that service inflation remains a concern.
Traders are now eagerly awaiting the flash estimate of the Eurozone Harmonized Index of Consumer Prices (HICP) for August and the Unemployment Rate for July later in the day, looking for additional insights into the Eurozone's economic condition.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
