EUR/GBP declines below 0.8650 as BoE and ECB hold rates amid geopolitical uncertainty

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The EUR/GBP cross loses traction to near 0.8620 during the early European session on Friday. The Pound Sterling (GBP) edges higher against the Euro (EUR) after monetary policy decisions from both the Bank of England (BoE) and the European Central Bank (ECB).

EUR/GBP softens to around 0.8620 in Friday’s early European session.
The Bank of England held interest rates at 3.75% on Thursday.
ECB kept key interest rates unchanged at its March meeting as heightened geopolitical tensions weigh on the outlook for inflation and the economy.

The BoE kept interest rates steady at 3.75% at its March meeting on Thursday, as widely expected. BoE Governor Andrew Bailey said that the Middle East conflict will cause a "shock to the economy" that will push up inflation in the near term, adding that restoring safe shipping through the Strait of Hormuz is key to addressing energy price rises.

The ECB decided to keep interest rates on hold at its latest monetary policy meeting on Thursday, saying the war in Iran has made the outlook “significantly more uncertain." Policymakers said the conflict had created “upside risks for inflation and downside risks for economic growth,” prompting traders to up bets on potential ECB rate hikes later this year.

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.