EUR/GBP trades around 0.8450 after paring losses, assessing ECB policymakers' comments

• EUR/GBP recovers its daily losses following the remarks from ECB Policymakers.
• ECB Governing Council member Bostjan Vasle stated that the central bank is not committed to any predetermined rate path.
• BoE is expected to deliver additional rate cuts following a slowdown in UK wage growth and flat GDP data.

EUR/GBP recovers intraday losses, trading around 0.8430 during the early European hours on Friday. However, the EUR/GBP cross faced challenges following the European Central Bank’s (ECB) interest rate decision on Thursday.

The ECB reduced the Main Refinancing Operations Rate to 3.65% with a 60 basis points (bps) rate cut, exceeding the market expectations of a 25 bps cut. Additionally, in an interview with Deutschlandfunk early Friday, ECB policymaker and Bundesbank President Joachim Nagel mentioned that "core inflation is also moving in the right direction." Nagel expects the inflation goal to be achieved at the end of next year.

ECB Governing Council member Bostjan Vasle stated on Friday that "we are not committed to any predetermined rate path." Vasle also mentioned that inflation will largely be driven by core inflation and services. Meanwhile, ECB policymaker Olli Rehn emphasized that future policy decisions will continue to be based on an assessment of the inflation outlook, with current uncertainties highlighting the importance of relying on fresh economic data.

Traders are anticipating additional interest rate cuts by the Bank of England (BoE), particularly after this week's data indicated a slowdown in UK wage growth and a flat GDP print for the second consecutive month in July. These economic signals have reinforced expectations of more easing measures by the BoE.

Friday’s Eurozone Industrial Production is anticipated to decrease by 0.3% MoM in July, following a previous 0.1% decline. Meanwhile, the annual data is expected to show a 2.7% decline, an improvement from the previous 3.9% drop. On the UK front, Consumer Inflation Expectations will be eyed.

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.