- EUR/GBP depreciates on increasing odds of an ECB rate cut in October.
- UK GDP rose 0.5% quarter-on-quarter in the second quarter, slightly below the previously expected rise of 0.6%.
- The British pound is boosted by expectations that the Bank of England will likely take a slower approach to rate cuts.
EUR/GBP gives back its recent gains from the previous session, trading around 0.8340 during Asian hours on Monday. The currency cross remains lukewarm following the publication of second quarter Gross Domestic Product (GDP) data from the United Kingdom (UK).
The UK’s Gross Domestic Product (GDP) grew 0.5% quarter-on-quarter in the second quarter, slightly below the previously expected increase of 0.6%. On an annual basis, GDP increased by 0.7%, also below the previous forecast growth rate of 0.9%.
The EUR/GBP cross received downward pressure from the increasing chances of the European Central Bank (ECB) implementing another rate cut in October. Traders are likely to watch a series of economic releases from Germany scheduled for later in the day, including preliminary Consumer Price Index (CPI) data for September.
Furthermore, lower-than-expected inflation in France and Spain has reinforced the likelihood of the third cut in the ECB’s ongoing policy easing cycle, which began in June. The ECB resumed rate cuts in September after keeping rates steady in July.
Inflation in France grew by 1.5% year-on-year in September, significantly below the 1.9% estimate and the previous publication of 2.2%. On a monthly basis, price pressures eased at a sharp rate of 1.2%, beating expectations for a 0.8% decline. In Spain, the annual Harmonized Index of Consumer Prices (HICP) rose 1.7% in September, lower than the 1.9% expected and a drop from 2.4% in August. Month on month, the HICP fell 0.1%, contrary to expectations of no change.
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
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.
