EUR/USD held its position after four days of decline, trading around 1.0890 during the Asian session on Wednesday. The euro may face downward pressure as the European Central Bank (ECB) is widely expected to implement a 25 basis point cut on both the main refinancing operations and the deposit facility rate during Thursday’s policy meeting.
Traders are expected to closely keep a close eye on Harmonized Index of Consumer Prices (HICP) data from the eurozone, which will be released on Thursday ahead of the European Central Bank (ECB) policy decision.
Additionally, the ECB’s monetary policy statement and President Christine Lagarde’s speech during the post-meeting press conference will be key events of interest, as they may provide information regarding the Bank’s monetary policy direction.
The US Dollar Index (DXY), which measures the value of the US dollar (USD) against six other major currencies, held its position around its two-month high of 103.35 recorded on Monday. Strong employment and inflation data from last week have tempered expectations of aggressive easing by the Federal Reserve (Fed) in 2024.
Markets are now estimating a total of 125 basis points rate cuts over the next year. According to the CME FedWatch tool, there is currently a 94.1% probability of a rate cut of 25 basis points in November, while a major cut of 50 basis points is not expected.
On Tuesday, Federal Reserve Bank of Atlanta President Rafael Bostic said he expects only another 25 basis points interest rate cut this year, as reflected in his projections during last month’s U.S. central bank meeting ? According to Reuters, “the average forecast was 50 basis points above the 50 basis points previously applied in September.
What are the interest rates?
Interest rates are charged by financial institutions on loans given to borrowers and passed on as interest to savers and depositors. They are affected by base loan rates, which are set by central banks in response to changes in the economy. Central banks generally have a mandate to ensure price stability, which means targeting a core inflation rate of around 2% in most cases. If inflation falls below the target, the central bank may cut base lending rates with the aim of encouraging borrowing and boosting the economy. If inflation rises significantly above 2%, the central bank generally raises base lending rates in an attempt to reduce inflation.
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How do interest rates influence currencies?
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to put their money.
How do interest rates influence the price of gold?
Overall higher interest rates put upward pressure on the price of gold because they increase the opportunity cost of holding gold instead of investing in interest-bearing assets or keeping cash in the bank. If interest rates are higher this usually increases the price of the US dollar (USD), and since gold is priced in dollars, this has the effect of reducing the price of gold.
What is the fed funds rate?
The fed funds rate is an overnight rate at which US banks lend money to each other. This is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. This is set as a range, for example 4.75%-5.00%, although the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future fed funds rates are tracked by the CME FedWatch tool, which determines how financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
