EUR/GBP remains below 0.8800, downside seems limited due to ECB-BoE policy divergence
- EUR/GBP may appreciate as the Euro could gain on a cautious ECB policy outlook.
- ECB’s de Guindos said rate adjustments aren’t needed unless inflation dynamics or economic projections change.
- The Pound Sterling may weaken as expectations grow for a BoE rate cut in December.
EUR/GBP remains subdued for the fourth consecutive session, trading around 0.8790 during the European hours on Monday. The downside of the currency cross could be restrained as the Euro (EUR) receives support amid prevailing cautious sentiment surrounding the European Central Bank (ECB) policy outlook. The ECB is expected to keep rates unchanged for some time, with money markets now pricing only a 45% chance of a rate cut by September 2026, down sharply from over 80% in October.
ECB Vice President Luis de Guindos said on Monday that there is no need to adjust current interest rates unless inflation trends shift or projections are revised. Guindos noted that services and wages are moving in the right direction, inflation is nearing the 2% target, and while growth remains positive, it is still modest.
ECB policymaker Francois Villeroy de Galhau emphasized the need to keep policy options open, while Governing Council member Joachim Nagel called for vigilance on inflation. Meanwhile, Vice President Luis de Guindos said any drop in inflation below 2% would likely be temporary.
The EUR/GBP cross could edge higher as the Pound Sterling (GBP) may face downward pressure amid rising expectations that the Bank of England (BoE) will cut interest rates at its December meeting. BoE Governor Andrew Bailey hinted that rate reductions are on the horizon, with economists now anticipating a pre-Christmas cut. The central bank emphasized, however, that future easing will depend on how the inflation outlook evolves.
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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