EUR/GBP holds above 0.8650 as hawkish ECB comments support the Euro

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The Euro (EUR) edges up slightly against the British Pound (GBP) on Thursday, yet moving within previous ranges, following downbeat German consumer confidence figures and hawkish comments by European Central Bank (ECB) member and Bundesbank President Joachim Nagel.

The Euro regains ground against the Pound Sterling on Thursday, with the cross returning to the upper range of the 0.8600s.
EUR/GBP edges up following hawkish comments from ECB's Nagel.
From a wider perspective, the cross remains sideways, with both currencies weighed by risk aversion.

Nagel said earlier on Thursday that an interest rate hike in April will be an option at next month’s ECB meeting “if the war in the Middle East raises the spectre of an inflation surge in the Eurozone".

These comments follow Wednesday’s remarks by ECB President Christine Lagarde, who affirmed that the central bank will have to respond “in a forceful pr persistent way” if consumer inflation looks set to be well above the bank’s 2% target.

Higher borrowing costs might derail recovery

The prospect of higher interest rates amid sluggish economic growth in the region’s leading economies is keeping investors wary, weighing on demand for the common currency.

On Thursday, the German GfK Index showed that consumer confidence is expected to plunge to -28 in April from -24.8 in March. Data from Wednesday showed that the German IFO Business Climate deteriorated too, albeit less than expected, while the PMI survey underscored that the rise in energy prices could easily derail a tame economic recovery.

The Pound Sterling (GBP), however, is not faring much better, which keeps the cross in a choppy, sideways trading cycle. UK inflation data revealed that consumer prices remained at 3%, even before the start of the war, which has boosted market expectations that the Bank of England will be forced to hike rates more than once 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.