EUR/GBP rises to near 0.8400 as Pound Sterling weakens due to technical factors
- The EUR/GBP pair advances as the Pound Sterling extends its technical downward correction.
- The GBP may gain ground due to the increased likelihood of fewer interest rate cuts from the Bank of England.
- The Euro struggles as traders increasingly anticipate aggressive rate cuts by the European Central Bank in 2025.
EUR/GBP extends its gains for the second successive session, trading around 0.8400 during the European hours on Thursday. The EUR/GBP cross rises as the Pound Sterling (GBP) continues its technical downward correction, which began on Wednesday.
However, the downside of the British Pound could be restrained as traders anticipate fewer interest rate cuts from the Bank of England (BoE), with projections lowered to just two 25bps reductions this year, compared to earlier forecasts of more than three at the beginning of last month.
The British Retail Consortium (BRC) Like-For-Like Retail Sales saw a notable 3.1% increase in December 2024, a sharp rebound from the previous month's 3.4% decline. Despite the December uptick, the BRC reported that overall retail performance in the fourth quarter of 2024 remained lackluster, with year-on-year sales growth of just 0.4%.
The upside of the EUR/GBP cross could be limited as the Euro faces challenges as traders continue to anticipate aggressive European Central Bank (ECB) rate cuts in 2025 despite rising inflation in the Eurozone. This outlook could place additional selling pressure on the Euro (EUR) against its peers. The ECB is widely expected to cut rates by 25 basis points (bps) at its upcoming meeting on January 30.
In the Eurozone’s economic powerhouse Germany, Industrial Output jumped by 1.5% MoM, the federal statistics authority Destatis said in figures adjusted for seasonal and calendar effects, against the estimated 0.5% rebound and a 1.0% drop in October. Industrial Production fell by 2.8% year-on-year (YoY) in November versus October’s -4.2% revision. Later in the day, the Eurozone Retail Sales for November will be in focus.
Interest rates FAQs
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.
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.
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.
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.