- The EUR/GBP gained support as the demand for a higher deficit expense between the largest economies in the Eurozone increased.
- Germany approved a historical expenditure package of 500,000 million euros for defense and infrastructure, substantially increasing national debt.
- Operators expect the decision on the interest rates of the Bank of England on Thursday.
The EUR/GBP remains stable after winning in the previous session, oscillating around 0.8420 during Wednesday’s Asian negotiation hours. The crossing was strengthened as the euro (EUR) found support in the midst of the increase in demand for a higher deficit expenditure between the largest economies in the eurozone. In Germany, the main political parties – including the CDU/CSU, SPD and Verdes block – approved a historical spending package of 500,000 million euros for defense and infrastructure, significantly increasing national debt.
In addition, the euro could benefit from an improvement in the feeling of risk amid the hopes of a high fire between Russia and Ukraine. On Tuesday, US president Donald Trump and Russian President Vladimir Putin agreed to an immediate pause in attacks on energy infrastructure. However, Putin refused to support the wider fire, one month, negotiated by the Trump team with Ukrainian officials in Saudi Arabia.
In the front of the monetary policy, the operators have reduced the expectations of rate cuts of the European Central Bank (ECB) this year, now valuing only two reductions – probably in April and June. In addition, interest rates are no longer expected to fall below 2%.
The sterling pound (GBP) is quoted with caution while investors focus on the decision on the interest rates of the Bank of England (BOE) on Thursday. Markets widely anticipate that the BOE will maintain indebtedness costs by 4.5%, with a probable vote division of 7-2.
It is expected that the members of the Monetary Policy Committee (MPC) of the BOE, Catherine Mann and Swati Dhingra, advocate for a rate cut. In February, both pressed for a reduction of 50 basic points (PB) greater than usual, while most favored a more conventional cut of 25 bp.
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.
