- EUR/GBP attempts to extend gains after recovering daily losses on Tuesday.
- The risk-sensitive Euro could struggle as European economies may face challenges amid President-elect Donald Trump's tariff threat.
- The Pound Sterling may appreciate as BoE could potentially keep interest rates steady at 4.75% in December.
EUR/GBP remains steady after recovering daily losses, trading near 0.8350 during early European hours on Tuesday. However, downside risks persist for the EUR/GBP cross as the Euro faces pressure from growing concerns about the Eurozone's economic outlook. These concerns are fueled by uncertainties surrounding political instability in Germany and France.
The Euro, being sensitive to risk, could face additional downward pressure as European economies may struggle amid worsening global sentiment. This follows US President-elect Donald Trump's pledge to impose higher tariffs on China, Mexico, and Canada, intensifying fears of escalating global trade tensions.
Markets have fully priced in a 25 basis point (bps) rate cut by the European Central Bank (ECB) in December, while the likelihood of a larger 50 bps cut has climbed to 58%, highlighting growing market pessimism about the Eurozone's economic prospects.
In contrast, market sentiment has shifted toward the Bank of England (BoE) potentially slowing the pace of policy easing and keeping interest rates steady at 4.75% during its December meeting. This is attributed to the annual inflation rate surging to 2.3% in October, the highest level in six months, up from 1.7% in September. Such a decision would strengthen the Pound Sterling (GBP) and apply further downward pressure on the EUR/GBP cross.
However, the GBP faced challenges last week due to weak economic data. UK Retail Sales saw a sharper-than-expected decline in October, while the flash S&P Global/CIPS Composite Purchasing Managers' Index (PMI) for November dropped below the 50.0 mark for the first time since October 2023, signaling a contraction in economic activity.
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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