- EUR/GBP climbs as market sentiment improves after Germany’s conservative election victory.
- Investors focus on the coalition-building process, with strong leadership viewed as essential for driving key fiscal reforms in Germany.
- The Pound Sterling may find support as expectations for a Bank of England rate cut in March ease.
EUR/GBP gains as the Euro finds support following Germany’s Conservatives victory in the election, aligning with expectations. Preliminary results confirm the win for the Christian Democratic Union (CDU) and its ally, the Christian Social Union (CSU), led by chancellor candidate Friedrich Merz. The currency cross trades around 0.8300 during the early European hours on Monday.
Market attention now shifts to the coalition-building process, with stable leadership seen as crucial for advancing key fiscal reforms. This political outcome comes amid Germany’s economic stagnation, the ongoing conflict in Ukraine, and rising tariff threats from US President Donald Trump. A proposed reform of Germany’s debt brake, which has long hindered investment, is expected to further strengthen the Euro.
Meanwhile, European Central Bank (ECB) policymaker Pierre Wunsch told the Financial Times that while he isn’t advocating for an April pause, rate cuts shouldn’t happen automatically without proper consideration. ECB’s Francois Villeroy de Galhau also suggested the ECB could lower its deposit rate to 2% by summer, according to Reuters.
However, EUR/GBP’s upside may be limited as the Pound Sterling (GBP) draws support from strong UK Retail Sales data for January, reducing expectations of a Bank of England (BoE) rate cut in March. These expectations were already challenged by hotter-than-expected January inflation and robust Average Earnings data through December.
However, the British Pound could face challenges as the Bank of England (BoE) Governor Andrew Bailey remains concerned over economic prospects this year. Earlier this week, Bailey warned that the economic growth is expected to remain sluggish.
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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