EUR/GBP holds losses near 0.8450 due to cautious tone surrounding the BoE policy outlook
- EUR/GBP dips amid rising confidence that the BoE will maintain higher interest rates for an extended period.
- BoE policymakers signaled that the process of easing monetary policy restrictiveness would be gradual.
- The Franziska Brantner-led German Green Party may support the approval of a defense spending deal.
EUR/GBP halts its seven-day winning streak, trading around 0.8430 during the European hours on Wednesday. The currency cross weakens as the Pound Sterling (GBP) strengthens, driven by growing trader confidence that the Bank of England (BoE) will keep interest rates higher for longer.
Market expectations for a prolonged restrictive monetary policy stance by the BoE are supported by strong wage growth in the United Kingdom (UK), which continues to fuel inflation in the services sector. Last week, four BoE policymakers, including Governor Andrew Bailey, told the Parliamentary Treasury Committee that unwinding monetary policy restrictiveness would be gradual, as inflation persistence is unlikely to subside on its own.
However, the EUR/GBP cross appreciated as the Euro (EUR) outperforms its peers, buoyed by optimism that the Franziska Brantner-led German Green Party will support the approval of a defense spending deal set for discussion on Thursday. Earlier, German leaders agreed to ease the borrowing cap, known as the “debt brake,” and establish a €500 billion infrastructure fund to bolster defense spending and stimulate economic growth.
Germany’s fiscal plans have also led traders to reconsider expectations for the European Central Bank (ECB) to implement two additional rate cuts by the summer. ECB policymaker and Bank of Finland Governor Olli Rehn noted that forecasts and core inflation indicators suggest inflation is on track to align with the 2% target.
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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