EUR/GBP edges higher to near 0.8350 due to rising likelihood of additional BoE rate cuts

• EUR/GBP received support following the speech made by the BoE policymaker Megan Greene.
• BoE’s Greene suggested that additional interest rate cuts are possible as prices are "moving in the right direction."
• The Euro may face challenges as the ECB has indicated that another cut could be on the horizon.

EUR/GBP extends its gains for the second successive session, trading around 0.8340 during Wednesday’s Asian hours. Traders are evaluating the impact of rising geopolitical tensions in the Middle East, which may have adversely affected the trade volumes of risk-sensitive currencies.

The Pound Sterling (GBP) may be facing downward pressure as Bank of England (BoE) policymaker Megan Greene indicated that further interest rate cuts are likely since prices are "moving in the right direction." However, Greene also cautioned that a consumption-driven recovery in the United Kingdom could spark a new wave of inflation, according to Bloomberg.

BoE policymaker Greene also stated that she believed the neutral interest rate had increased since the inflation shock. While most estimates suggest that the neutral rate for the Bank of England is around 3.5%, Greene did not provide a specific figure. The neutral rate refers to the level at which a central bank's policy neither stimulates nor constrains economic growth.

On the Euro's side, inflation in the Eurozone eased in September, falling below the European Central Bank's (ECB) target. The Harmonized Index of Consumer Prices (HICP) increased by 1.8% year-on-year in September, down from 2.2% in August. This marks the lowest rate since April 2021.

Despite the promising inflation rates for September, the Eurozone economy may still face challenges. The ECB reduced the Deposit Facility Rate to 3.50% in September and has indicated that another cut could be on the horizon.

Traders await the upcoming Unemployment Rate for the European Union, as well as speeches from members of the ECB scheduled for Wednesday. On the UK’s dock, the Bank of England’s Monetary Policy Report Hearings will be closely monitored on Thursday.

(This story was corrected on October 2 at 07:46 GMT to specify that the ECB cut the Deposit Facility Rate to 3.50% in September.)

Interest rates FAQs

What are interest rates?

Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.

How do interest rates impact currencies?

Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.

How do interest rates influence the price of Gold?

Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.

What is the Fed Funds rate?

The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.

Share: Feed news