• EUR/GBP declines as several ECB officials remain comfortable with the outlook for three more rate cuts in 2025.
  • The Euro may gain if a ceasefire in Ukraine is agreed upon and gas supplies resume.
  • Traders await the upcoming UK labor market and Consumer Price Index inflation data set to be released later this week.

EUR/GBP retraces its recent gains from the previous session, trading around 0.8330 during Monday's Asian hours. The Euro faces downward pressure as several European Central Bank (ECB) officials remain comfortable with the outlook for three more rate cuts this year, following a 25 basis point reduction to 2.75% last month.

However, the downside for EUR/GBP may be limited, as the Euro could find support if a ceasefire in Ukraine is reached and gas supplies resume. Reports indicate that US President Donald Trump and Russian President Vladimir Putin have agreed to begin negotiations to end the conflict, with Trump administration officials set to meet Russian counterparts in Saudi Arabia on Tuesday for talks on a potential peace deal.

Additionally, the EUR/GBP pair faces challenges following strong UK economic data released on Thursday. The UK economy grew by 1.4% year-on-year in Q4 2024, accelerating from an upwardly revised 1.0% in the previous quarter and exceeding market expectations of 1.1%, according to preliminary estimates. This marks the fastest GDP growth since Q4 2022. For the full year 2024, the British economy expanded by 0.9%, up from 0.4% in 2023, driven by a 1.3% increase in the services sector, compared to 0.4% growth the previous year.

Traders will be watching the upcoming UK labor market and Consumer Price Index (CPI) inflation data, due on Tuesday and Wednesday, respectively. Both economic indicators will play a key role in shaping market speculation about whether the Bank of England (BoE) will lower interest rates again at its March meeting. The BoE recently reduced its key borrowing rate by 25 basis points (bps) to 4.5% on February 6.

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.

 

Source: Fxstreet