EUR/GBP holds losses below 0.8350, downside seems restrained due to dovish BoE
- EUR/GBP depreciates due to the increased likelihood of further ECB rate cuts.
- ECB’s Villeroy described Trump's tariffs as a "very worrying development."
- Traders expect the BoE to deliver a 25 basis point rate cut on Thursday.
EUR/GBP trades around 0.8330 during the European session on Monday after recovering some part of its daily losses. However, the EUR/GBP cross faces challenges as the Euro remains under pressure due to increasing expectations of further interest rate cuts by the European Central Bank (ECB). The January’s Harmonized Index of Consumer Prices for the European Monetary Union will be eyed later in the day.
Last week, the ECB cut its Deposit Facility Rate by 25 basis points (bps) to 2.75%, while the Main Refinancing Operations Rate dropped to 2.9%, as anticipated. Markets had already factored in the rate cut, expecting inflation in the Eurozone to remain on track toward the ECB's 2% target.
On Monday, ECB policymaker Francois Villeroy de Galhau stated that US President Donald Trump's tariffs will heighten economic uncertainty, describing it as a "very worrying development." He added that there will likely be further rate cuts, according to Reuters.
On Saturday, the US informed that it would impose 25% tariffs on Canadian and Mexican goods, while Chinese exports would face a 10% tariff. These tariffs are set to take effect on Tuesday and will remain in place until the fentanyl overdose crisis is "sorted."
The downside of the EUR/GBP pair might be limited as the Pound Sterling (GBP) faces risks due to expectations that the Bank of England (BoE) will restart its policy-easing cycle, likely cutting interest rates by 25 basis points (bps) to 4.5% in February.
Investors are closely monitoring the BoE’s monetary policy decision next Thursday, with expectations of a dovish stance given recent signs of slowing inflation, despite continued wage growth acceleration. The BoE’s monetary policy guidance could be dovish as recent inflation indicators show signs of deceleration, although wage growth remains on the rise. Financial market participants anticipate three interest rate cuts from the BoE this year amid declining labor demand and weakening business confidence.
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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