EUR/GBP appreciates to near 0.8550, upside seems limited due to dovish ECB's tone
- EUR/GBP may lose ground again as the Euro struggles following dovish comments from the ECB officials.
- ECB’s Francois Villeroy de Galhau noted that the central bank may cut interest rates despite the volatile Oil market.
- BoE Governor Andrew Bailey said that the impact of trade tariffs on inflation is more uncertain.
EUR/GBP edges higher after registering losses in the previous session, trading around 0.8530 during the Asian hours on Wednesday. However, the currency cross faced challenges as the Euro (EUR) lost ground following the dovish remarks from the European Central Bank’s (ECB) officials.
ECB policymaker Francois Villeroy de Galhau told the Financial Times on Tuesday that the central bank could still cut interest rates despite the volatility seen in the Oil market. Meanwhile, ECB chief economist Philip Lane said that "Our monetary policy will have to take into account not only the most likely path (the baseline) but also the risks to activity and inflation," per Reuters.
The Bank of England (BoE) Governor, Andrew Bailey, said during testimony before the Lords Economic Affairs Committee on Tuesday that the impact of trade tariffs on inflation is more ambiguous than the impact on economic growth. Bailey also said, "I think we are starting to see the labor market softening." "Wage settlements are likely to come off," per Reuters.
Meanwhile, BoE Deputy Governor Dave Ramsden noted that if evidence becomes stronger that inflation will undershoot the target, they can speed up rate cuts. Ramsden added that the United Kingdom (UK) has a challenging fiscal environment, although he is less concerned than other Monetary Policy Committee members that disinflation will stall.
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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