- EUR/GBP is slightly lower as the likelihood of an ECB rate cut in September increases.
- The Eurozone Producer Price Index rose 0.8% month-on-month in July, the largest increase since December 2022.
- Sterling strengthens as expectations grow that the BoE will remain more hawkish compared to the ECB.
The EUR/GBP gives back its recent gains from the previous session, trading around 0.8420 during Asian hours on Thursday. Traders await Eurozone retail sales data due later in the day.
The EUR/GBP pair’s fall could be attributed to growing speculation that the European Central Bank (ECB) will cut interest rates in September. The ECB rate cut would mark the second interest rate cut by the ECB since it began shifting towards policy normalisation in June.
In the Eurozone, the Producer Price Index (PPI) rose by 0.8% month-on-month in July, the largest increase since December 2022. This follows an upwardly revised increase of 0.6% in June and significantly exceeds market forecasts of 0.3%.
However, the Eurozone services PMI fell to 52.9 in August, from 53.3 in the previous month. Meanwhile, the composite PMI declined to 51.0, missing expectations and falling below the previous reading of 51.2.
The British Pound (GBP) is advancing further on rising expectations that the Bank of England (BoE) rate-cutting cycle will likely be slower than that of the European Central Bank. Bets were raised by Tuesday’s BRC comparable retail sales, which rose 0.8% year-on-year in August, compared with a 0.3% rise in July, marking the fastest growth in five months.
Meanwhile, there was positive sentiment from the UK macroeconomic front as a Purchasing Managers’ Index (PMI) survey showed business activity in August accelerated at its fastest pace since April.
On Wednesday, the S&P Global UK Composite PMI rose to 53.8 in August, from 53.4 in the previous month and revised up from the preliminary estimate of 53.4. The Services PMI rose to 53.7 in August, compared with 53.3 in the previous month. Data showed on Monday that the Manufacturing PMI remained stable at 52.5 for August, consistent with preliminary estimates.
Interest Rates FAQs
Financial institutions charge interest rates on loans to borrowers and pay them out as interest to savers and depositors. These are influenced by base interest rates, which are set by central banks based on economic developments. Central banks are typically mandated to ensure price stability, which in most cases means targeting an underlying inflation rate of around 2%.
If inflation falls below target, the central bank can cut base interest rates, in order to stimulate lending and boost the economy. If inflation rises substantially above 2%, the central bank typically raises base 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 rather than 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 typically set by the Federal Reserve at its FOMC meetings. It is set within a range, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the figure quoted.
Market expectations for the Federal Reserve funds rate are tracked by the CME’s FedWatch tool, which measures the behavior of many financial markets in anticipation of future Federal Reserve monetary policy decisions.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
