- EUR/GBP treads water as markets take a breather ahead of PMI data from both economies.
- ECB officials adopt caution about committing to a rate-cut trajectory due to concerns over inflation rebound.
- The Pound Sterling receives support as last week's economic reports have increased the odds of BoE maintaining current rates.
EUR/GBP hovers around 0.8540 during the early European session on Wednesday, grappling to extend its winning streak. The EUR/GBP cross may appreciate further as traders expect the European Central Bank (ECB) to gradually lower interest rates. However, ECB officials have been cautious about committing to a specific rate-cut schedule, given concerns that inflationary pressures might pick up again.
On Tuesday, the Harmonized Index of Consumer Prices (HICP) data from the European Monetary Union (EMU) reported no month-on-month change for July, as anticipated. Meanwhile, the Core HICP fell by 0.2%, aligning with the decline seen in June.
In the United Kingdom (UK), Public Sector Net Borrowing (excluding public sector banks) rose to £3.1 billion in July, up from £1.3 billion in the same month the previous year and far surpassing market expectations of £1.5 billion.
The Pound Sterling (GBP) receives support as last week's UK inflation and employment reports have bolstered the argument for the Bank of England (BoE) to keep the interest rate at 5.0% during its upcoming September meeting. Rupert Thompson, Chief Economist at IBOSS, also noted, "The BoE is likely to leave rates unchanged at their September meeting, with the next rate cut probably postponed until November."
Traders are set to closely monitor the Purchasing Managers Index (PMI) data from the United Kingdom, the Eurozone, and Germany, scheduled for release on Thursday. These reports could offer deeper insights into the economic conditions across both the UK and the Eurozone, potentially influencing policy decisions by their respective central banks.
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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