The GBP/EUR evolution: Key insights to understand the behavior of the GBP/EUR pair

Current Overview of the GBP/EUR Currency Pair

The currency pair facing the British pound against the euro represents one of the most dynamic instruments in the global foreign exchange markets. In early February 2024, this cross was trading at €1.120, reflecting a 1.45% decline in the last month and a 2.03% decrease in the previous quarter. These movements highlight the volatile nature of this financial instrument, particularly relevant for European and British investors interested in the pound-euro evolution.

Over the past 52 weeks, the pair has fluctuated between 1.0786 and 1.2190 €, offering recurrent opportunities for active traders. Historically, the highest point was 1.752 € in May 2000, while the lowest was recorded in December 2008 at 1.02 €. These historical references illustrate the magnitude of movements this pair has experienced over the decades.

Determining Factors in the Evolution of the Pound-Euro Exchange Rate

The trajectory of GBP/EUR is influenced by multiple macroeconomic variables. GDP indicators, inflation, interest rates, performance of the manufacturing and services sectors, as well as unemployment figures, exert substantial influence on the demand for both currencies.

The 2016 Brexit referendum marked a definitive turning point in the pound-euro evolution. Before this vote, the cross was consistently above 1.30 €. After the result, the British pound experienced its largest daily depreciation in three decades, initiating a downward trend that would last for years. For most of the period after 2016, the pair has remained confined between 1.06 and 1.21 euros.

Additional declines recorded in 2017 and 2019 deepened the weakness of the British currency, bringing it to historic lows against the euro and other major currencies. This behavior responded to market expectations of increased trade frictions, rising uncertainty, and persistent political instability in the UK. As financial institutions sold assets denominated in pounds sterling, the relative value of the currency contracted significantly.

In 2022, the exchange rate started the year near the upper end of its five-year range, but since summer, it has fallen toward lower levels. More recently, in mid-January 2023, the pound reached its lowest against the euro since September, trading at €1.124.

Monetary Policies of the Bank of England and the European Central Bank

Both the Bank of England and the European Central Bank (BCE) have adopted similar stances regarding monetary policy, although their trajectories may diverge depending on specific economic conditions in each region.

The Bank of England has progressively increased its interest rates and has expressed willingness to continue this strategy if circumstances justify it. The ECB has followed a comparable approach, responding to inflationary pressures. However, any misalignment between these institutions could generate significant impacts on the valuation of the EUR/GBP pair.

OECD economic forecasts reveal divergent prospects for both economies. For the UK, near-zero growth was projected for 2023, revised downward. In contrast, the eurozone presented relatively more optimistic prospects, with expectations of modest growth. The British economy faces recession risks in upcoming quarters, with anemic recovery expected in 2024.

Market Sentiment and Macroeconomic Events

Beyond economic fundamentals, market sentiment plays a decisive role in fluctuations of the GBP/EUR pair. Persistent uncertainty stemming from negotiations between the UK and the European Union regarding exit conditions has kept pressure on the British pound.

Subsequently, the Russia-Ukraine war introduced new inflationary dynamics in both regions, altering monetary policy expectations and exchange rate behavior. Currency markets respond swiftly to these geopolitical variables.

Liquidity is also a relevant factor. While GBP/EUR exhibits high liquidity, its inverse (EUR/GBP) is less liquid. When liquidity in one of these pairs significantly exceeds the other, spreads (spreads) widen during episodes of higher volatility.

Technical Characteristics of the Currency Pair

The GBP/EUR pair belongs to the segment of minor currencies, distinguished from major pairs by lower trading volumes and, in some cases, higher relative volatility. However, in this particular case, the pair shows a moderate level of fluctuation compared to other currency instruments.

The reason lies in the fact that both the British pound and the euro represent major global financial and commercial centers. The euro is used in EU member countries, while the pound operates in the UK. This structural importance limits abrupt variations in the exchange rate, a feature valued in international trade.

Nevertheless, extraordinary events can generate significant oscillations. An abrupt appreciation or depreciation of the pair would be interpreted as a warning sign of economic or financial turbulence in one of the regions.

Trading Opportunities with CFD in the EUR/GBP Pair

For investors interested in speculating on the future direction of the pair, contracts for difference (CFD) offer a flexible alternative. Through this structure, it is not necessary to physically hold euros or pounds. Instead, the investor opens speculative positions based on their outlook on future price movements.

CFDs allow both long (long) and short (short) positions. In a long position, profit is realized when the closing position results in a higher value than the opening. In a short position, the opposite occurs. The net gain corresponds to the difference between both orders.

This instrument has gained international popularity among investors and traders for its flexibility and accessibility. It allows exposure to currency movements without requiring capital equivalent to the full notional value.

Practical Recommendations for Trading the GBP/EUR Pair

Optimal trading hours: The hours of greatest volatility and volume coincide with the European trading session, specifically during London hours (08:00 - 17:00 local time), which accounts for approximately 35% of the daily forex volume.

Monitoring economic news: Constantly tracking macroeconomic events in both economies is essential. Inflation announcements, monetary policy decisions, employment data, and GDP reports can generate significant movements in the pair.

Technical analysis and trends: Before executing trades, it is vital to identify prevailing trends through technical analysis. Tools such as trend oscillators, moving averages, and support/resistance levels facilitate the identification of entry and exit points.

Considering volatility: Although GBP/EUR exhibits moderate volatility compared to other currency pairs, periods of geopolitical uncertainty or major macroeconomic announcements can significantly widen fluctuation ranges.

Current Outlook on the Pound and Euro

The pound has shown some stabilization amid a light economic calendar. However, markets remain attentive to inflation expectations data prior to the Bank of England rate announcements. The more cautious approach recently adopted by this institution has exerted pressure on the British currency.

Meanwhile, employment data published in the UK suggest that risks may tilt upward for the GBP/EUR pair. In 2022, the pair fluctuated between 1.08 € and 1.21 €. In early December 2022, the pound was the best performer among major currencies, although it declined before the Christmas holidays.

Final Conclusions

The GBP/EUR pair is one of the most traded and observed exchange rates in international markets. Its evolution reflects complex dynamics derived from economic fundamentals, monetary policy decisions, market sentiment, and unexpected geopolitical events.

For those actively participating in trading this pair, it is essential to maintain constant vigilance on economic developments, identify prevailing technical trends, and execute trades during windows of higher liquidity and volatility.

Risk warning: There is no guarantee of performance or profits in currency trading. Therefore, only capital that can be lost without compromising personal financial stability should be invested. Forex trading involves a high level of risk.