- EUR/GBP receives support ahead of the PMI readings from the Eurozone, Germany, and the UK.
- The Euro may face challenges as traders expect the ECB to implement a series of rate cuts.
- The Pound Sterling could face challenges amid the latest softer economic data from the United Kingdom.
EUR/GBP recovers after registering losses in the previous session, trading around 0.8440 during early European hours on Friday. The EUR/GBP cross gains traction ahead of the preliminary January readings for the HCOB Purchasing Managers Index (PMI) from the Eurozone and Germany. Traders are also eyeing the release of the UK’s preliminary S&P Global PMI data.
The Euro strengthens against its peers, supported by improved risk sentiment following recent comments from US President Donald Trump. Trump called for an immediate interest rate cut by the US Federal Reserve, citing falling Oil prices as a reason. “With oil prices going down, I’ll demand that interest rates drop immediately, and likewise, they should be dropping all over the world,” Trump stated during the World Economic Forum in Davos, Switzerland.
However, the Euro's upside may be capped as markets expect the European Central Bank (ECB) to implement a series of rate cuts, with a 25 basis point reduction anticipated at each of the next four policy meetings. These expectations are fueled by concerns over the Eurozone’s economic outlook and subdued inflationary pressures.
Meanwhile, the Pound Sterling (GBP) faces challenges after disappointing UK data, including weaker-than-expected December inflation and retail sales, declining labor demand through November, and sluggish GDP growth.
The softer economic reports from the United Kingdom (UK) have strengthened expectations of a 25 basis point rate cut by the Bank of England (BoE) in February, with markets now pricing in a near-certain reduction of the BoE’s policy rate to 4.5% at its next meeting. As a result, the upside potential for the British Pound may remain constrained in the near term.
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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