EUR/GBP remains above 0.8650 as ECB pause prospects limit downside
- EUR/GBP weakens after Thursday’s release of soft macroeconomic data from Germany.
- The Euro may rebound as traders anticipate the ECB will pause its easing cycle in September.
- The Pound Sterling appreciated as the Bank of England reduces interest rates by 25 basis points with narrow majority.
EUR/GBP remains subdued for the second successive session, with registering more than 0.5% losses in the previous session and trading around 0.8670 during the Asian hours on Friday. The currency cross depreciates as the Euro (EUR) struggles following the soft macroeconomic data from Germany, the largest economy in the Eurozone, released on Thursday.
The seasonally adjusted Industrial Production in Germany contracted by 1.9% month-over-month in June, came below the 0.5% drop expected and following a 0.1% decline in the previous month. Meanwhile, the non-seasonally adjusted production declined by 3.6% year-over-year in June, following the 0.2% previous decline. The German trade balance fell to a EUR 14.9 billion surplus from May's EUR 18.6 billion, well below the EUR 17.3 billion expected.
However, the Euro may gain ground against its peers as traders expect the European Central Bank (ECB) to pause easing cycle at September meeting, with approximately 87% odds for the central bank to keep rates unchanged. Markets are assigning only around a 60% probability of another ECB rate cut before March 2026.
The EUR/GBP cross also faced challenges as the Pound Sterling (GBP) attracts buyers after the Bank of England (BoE) reduces interest rates by 25 basis points (bps) to 4%, as widely expected. Meanwhile, the UK’s central bank reiterated its “gradual and careful” approach to monetary easing. In the policy statement, Governor Andrew Bailey noted that interest rates remain on a downward path, with any future cuts to be implemented gradually and cautiously.
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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