EUR/GBP edges higher to near 0.8750 due to cautious ECB policy outlook

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EUR/GBP gains ground after registering slight losses in the previous session, trading around 0.8740 during the European hours on Tuesday.

EUR/GBP gains ground on cautious sentiment surrounding the ECB's near-term policy stance.
Germany’s GfK Consumer Confidence Survey fell to -24.1 for November, against the expected -22.0 reading.
The Pound Sterling may struggle as traders expect the BoE to deliver a 25-basis-point rate cut in November.

EUR/GBP gains ground after registering slight losses in the previous session, trading around 0.8740 during the European hours on Tuesday. The currency cross advances following the release of the GfK Consumer Confidence Survey from Germany, which dropped to -24.1 for November from a slightly revised -22.5 previously, missing market expectations of -22.0. This marks the lowest reading since April.

The EUR/GBP cross receives support as the European Central Bank (ECB) is widely anticipated to hold its interest rates after policymakers have signaled that the easing cycle is likely over. Rate futures now imply only a slim chance of an additional cut by the end of 2026. Traders await preliminary German inflation data for October and the Eurozone Q3 Gross Domestic Product (GDP), which will be published later this week.

However, the Euro (EUR) may struggle due to political uncertainty in France. Socialist Party leader Olivier Faure has warned that he will move to topple Prime Minister Sébastien Lecornu’s government if his party’s budget demands are not met. Meanwhile, Moody’s Ratings revised France’s outlook to “negative,” citing risks of political gridlock and a persistently high fiscal deficit.

On the contrary, the Pound Sterling (GBP) may face challenges against its peers due to the likelihood of further easing by the Bank of England (BoE), driven by concerns over the United Kingdom’s (UK) fiscal outlook ahead of the November Autumn Budget. Markets are now pricing in a higher likelihood of a 25-basis-point rate cut in November, following steady inflation in the UK for September and additional signs of cooling in the labor market.

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.