- The EUR/GBP advances as the euro is strengthened, backed by more strong eurozone inflation data than expected.
- The impact on the ECB’s policy perspective will probably be limited despite the surprise upwards.
- It is widely anticipated that the Bank of England will cut interest rates at 25 basic points on Thursday.
The EUR/GBP continues to rise for a fourth consecutive session, quoting around 0.8530 during the first European hours on Monday. The crossing of currencies is winning as the euro (EUR) is strengthened thanks to the robust inflation data of the Eurozone, published on Friday.
According to Eurostat, the Harmonized Consumer Price Index (IAPC) – which excludes volatile components such as food, energy, alcohol and tobacco – contributed a 2.7% year -on -year in April, exceeding both the market forecast of 2.5% and reading of 2.4% of March. The general IAPC also exceeded expectations, increasing 2.2% annually compared to 2.1% early. In monthly terms, the underlying IAPC and the general rose 1.0% and 0.6%, respectively.
Despite the highest inflation data than expected, the impact on the monetary policy perspective of the European Central Bank (ECB) is expected to be maintained. Policies responsible are increasingly focused on the broader economic slowdown, particularly in the middle of the additional pressure of the new tariffs announced by US President Donald Trump. Most ECB officials continue to trust that inflation will return to the goal of 2% this year, with the markets continuing to incorporate a 25 basic points cut at the June meeting.
At the same time, the sterling pound (GBP) faces pressure due to the growing expectations that the Bank of England (BOE) will reduce interest rates by 25 basic points up to 4.25% during its policy meeting on Thursday. Moderate feeling comes from several factors: persistent global uncertainty related to US tariffs, a weakened United Kingdom labor market, partly due to the increase in social security contributions of employers, and softer inflation figures than expected for March.
US interest rates
Financial institutions charge interest rates on loans to borrowers and pay them as interest to savers and depositors. They influence the basic types of interest, which are set by central banks based on the evolution of the economy. Normally, central banks have the mandate to guarantee the stability of prices, which in most cases means setting as an objective an underlying inflation rate around 2%.
If inflation falls below the objective, the Central Bank can cut the basic types of interest, in order to stimulate credit and boost the economy. If inflation increases substantially above 2%, the Central Bank usually rises the interest rates of basic loans to try to reduce inflation.
In general, higher interest rates contribute to reinforce the currency of a country, since they make it a more attractive place for world investors to park their money.
The highest interest rates influence the price of gold because they increase the opportunity cost of maintaining gold instead of investing in an asset that accrues interest or depositing effective in the bank.
If interest rates are high, the price of the US dollar (USD) usually rises and, as gold quotes in dollars, the price of low gold.
The federal funds rate is the type to a day that US banks lend each other. It is the official interest rate that the Federal Reserve usually sets at its FOMC meetings. It is set at a fork, for example 4.75%-5.00%, although the upper limit (in this case 5.00%) is the aforementioned figure.
Market expectations on the interest rate of the Federal Reserve funds are followed by the Fedwatch of the CME tool, which determines the behavior of many financial markets in the forecast of future monetary policy decisions of the Federal Reserve.
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.
