EUR/GBP declines towards 0.8350 ahead of Eurozone inflation data

  • EUR/GBP loses ground despite less dovish sentiment around the ECB following strong Eurozone GDP data.
  • Traders await Eurozone Harmonized Index of Consumer Prices (HICP) data on Thursday.
  • The UK Budget includes £40 billion in tax increases aimed at reducing public finance deficits and improving the funding of public services.

EUR/GBP is trading slightly lower during early European hours on Thursday near 0.8360, following strong gains in the previous session. This decline could be limited, as the Euro could find support from investors reducing expectations of a large rate cut by the European Central Bank (ECB) in December.

This shift in sentiment on ECB policy comes after stronger-than-expected economic data was released from the Eurozone and Germany on Wednesday. Investors will be keeping an eye on the Eurozone Harmonized Index of Consumer Prices (HICP) on Thursday.

According to preliminary Eurostat estimates, the seasonally adjusted Eurozone Gross Domestic Product (GDP) expanded by 0.4% quarter-on-quarter in the third quarter, exceeding the expected increase of 0.2%. In year-on-year terms, Eurozone GDP grew by 0.9%, above the forecast growth of 0.8%.

In Germany, GDP rose 0.2% quarter-on-quarter in the third quarter, recovering from a 0.3% drop in the second quarter and beating expectations for a 0.1% contraction, according to preliminary data. Additionally, Germany’s Consumer Price Index (CPI) showed an annual inflation rate of 2.0% in October, a three-month high, up from 1.6% in September and above the projected 1.8%, according to preliminary estimates.

The EUR/GBP cross also gained support as the British Pound (GBP) weakened following the announcement of the UK Labor government’s first budget on Wednesday. This budget includes £40 billion in tax increases aimed at reducing public finance deficits and strengthening public services, CNBC reported. A major source of revenue in the Budget is an increase in National Insurance (NI) contributions, an income tax paid by employers.

Additionally, traders are likely to keep an eye on an upcoming keynote speech by Bank of England (BoE) Deputy Governor Sarah Breeden at a conference organized by the Hong Kong Monetary Authority and the Bank for International Settlements on the “Opportunities and Challenges of Emerging Technologies in the Financial Ecosystem”.

Interest rates FAQs

Financial institutions charge interest rates on loans from borrowers and pay them as interest to savers and depositors. They are influenced by basic interest rates, which are set by central banks based on the evolution of the economy. Typically, central banks are mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below the target, the central bank can cut base interest rates, in order to stimulate credit and boost the economy. If inflation rises substantially above 2%, the central bank typically raises core lending rates to try to reduce inflation.

In general, higher interest rates help strengthen a country’s currency by making it a more attractive place for global investors to park their money.

Higher interest rates influence the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or depositing cash in the bank.
If interest rates are high, the price of the US Dollar (USD) usually rises and, since Gold is priced in dollars, the price of Gold falls.

The federal funds rate is the overnight rate at which U.S. banks lend to each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set in a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations about the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which determines the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.

Source: Fx Street

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