EUR/GBP steadies near 0.8700 due to political uncertainty in France

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EUR/GBP holds ground for the second successive session, trading around 0.8680 during the Asian hours on Monday. The currency cross maintains its position as the Euro (EUR) steadies, driven by market caution amid political uncertainty in France.

EUR/GBP moves little as traders adopt caution ahead of French Prime Minister François Bayrou’s confidence vote.
President Trump announced that European leaders will visit the United States to discuss potential solutions to the Russia-Ukraine war.
Robust UK consumer demand supports the Bank of England’s restrictive policy stance.

French Prime Minister François Bayrou is poised for near-certain defeat in Monday’s confidence vote, threatening to destabilize the Eurozone’s second-largest economy. The government’s likely collapse risks worsening France’s political paralysis at a crucial moment for Europe as it seeks unity amid Russia’s war in Ukraine, per Reuters.

US President Donald Trump said on Sunday that European leaders would visit the United States (US) on Monday or Tuesday to discuss how to resolve the Russia-Ukraine war. Trump added that he was "not happy" about the status of the Russia-Ukraine war, after a massive Russian air assault overnight on Sunday.

The Euro receives support ahead of the European Central Bank (ECB) meeting due on Thursday. Traders expect the ECB to keep rates unchanged for the second consecutive meeting, supported by steady growth and inflation hovering near the target.

Eurozone Gross Domestic Product (GDP) rose 0.1% QoQ, exactly as expected and unchanged from the earlier estimate, while annual growth picked up slightly to 1.5% from 1.4%. Moreover, the Eurozone Harmonized Index of Consumer Prices (HICP) rose at an annual rate of 2.1% in August, after having risen 2% in July.

The Pound Sterling (GBP) may gain ground as strong consumer demand in the United Kingdom (UK) leads to higher consumer inflation and reinforces the restrictive policy stance by the Bank of England (BoE). United Kingdom (UK) Retail Sales surprisingly grew at a faster pace of 0.6% month-over-month in July, compared to the 0.2% expected. The Retail Sales climbed by 1.1%, missing estimates of 1.3% but faster than the 0.9% increase seen in June.

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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.

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