EUR/GBP, or euro to British pound, is one of the most heavily traded minor currency pairs in foreign exchange. While the pair does not rank among the most heavily traded pairs (these are known as major pairs), the exchange rate is closely monitored in Europe. This is because of the close trading relationship between the UK and the Eurozone. In general, both currencies tend to appreciate during economic booms and weaken during downturns. Thus overall volatility in EUR/GBP tends to be fairly limited.
In our last commentary on the euro in late August, we wrote that the common currency was set to weaken further thanks to (1) slowing growth, (2) slowing inflation and (3) an outsized speculator long position in euro futures and options. Following the publication of our last commentary, EUR/USD has weakened from 1.1730 – 1.180 (the top-end of its trading range that we update daily on our...
In our last take on the euro in April, we wrote that the bullish case for the currency was running out of drivers. Specifically, we wrote that decelerating Eurozone growth (in rate-of-change terms), changes in trading patterns and overly bullish speculator sentiment was likely to weigh on the euro in the future. At the time, EUR/USD was trading around 1.23, near its 2018 high just above 1.2550.
Earlier today, we downgraded our euro outlook to neutral in the medium-term, and bearish in the short-term. As the euro runs out of momentum, the trend is now neutral based on quantitative factors such as price, trading volumes and volatility. While forward-looking economic indicators continue to suggest an ongoing expansion, growth appears to be slowing in rate-of-change terms. This is why our p…
In our previous piece on pound sterling, we wrote that the currency was likely to weaken thanks to (1) slowing growth across Europe, (2) excessively bullish speculator sentiment and (3) Brexit-related woes. Thanks to the UK’s significant trading ties with the EU, we wrote that the pound was unlikely to escape a slowdown across the region. Furthermore, speculator positioning in the pound looked ex…
In our previous analysis on the pound, we claimed that the number of catalysts driving the currency’s bullish trend were running out. At the time, we warned that the rally was running out of momentum, but did not see any evidence that would suggest adopting a bearish stance. Following recent weakness in the British pound, we downgraded our longer-term outlook on the currency to bearish on April 2…
The outlook for the pound, while still bullish, is looking less optimistic today. More specifically, factors including the ongoing slowdown in regional growth, lower expectations for a May rate hike, and significant speculator interest in the currency are hampering the rally. Following Brexit, the trade-weighted value of pound sterling (a measure of GBP relative to other currencies) hit an all-t…
Significance of the EUR/GBP pair
Given the close economic relationship between the United Kingdom and the Eurozone, euro to British pound is the most important minor currency pair in foreign exchange. While EUR/GBP is not among the most heavily traded currency pairs in the world (i.e. the major currency pairs), it is nonetheless of special significance for businesses and individuals based in the Eurozone and the United Kingdom.
The euro is the world’s second-most traded currency while the pound is the fourth-most traded currency. The euro tends to gradually strengthen during global economic booms, while selling off during downturns. Movements in the pound are more closely related to the performance of the underlying economy of the United Kingdom. Relative GDP growth rates for the Eurozone and the United Kingdom are shown below:
2003 – Late 2007: pre-financial crisis calm
In the years leading up to the financial crisis, both the British pound and the euro traded in a narrow channel. While the value of both currencies fluctuated quite a bit during this time (especially against the US dollar), they remained fairly close to each other. Looking at EUR/GBP, the pair traded between 0.72 and 0.65 during this time.
Both began appreciating in 2003, as GDP growth accelerated following the technology and telecom stock market bubble in 2000. When growth in the Eurozone began decelerating in 2005, thanks to growing unemployment and government deficits, the British pound weakened alongside the common currency. The euro to British pound exchange rate was thus fairly stable. In 2006, both currencies began broadly rallying as investors grew wary of slowing US growth. Eurozone and the British GDP growth also resumed accelerating during this time. In general, this was a golden era for both currencies and optimism for European growth was high.
Late 2007 – 2009: the global financial crisis
Starting in September 2007, EUR/GBP began a steep ascent from around 0.68. The pair made its long term top around 0.96 at the end of 2008. Looking more deeply at each currency, the British pound began selling off in late 2007 as issues in the US housing market appeared to be worsening. Given London’s status as a leading global financial center (and the British banking sector’s heavy exposure to US dollar liabilities), fears of contagion resulted in a weaker pound. The euro, on the other hand, began sharply appreciating (against both the pound and the US dollar) as markets initially considered the currency to be a safe haven from problems in the US.
Starting from July 2008, both the pound and the euro began selling off sharply against the US dollar. As the pound was relatively weaker, EUR/GBP kept climbing until the end of 2008. As we have written in the past, the US housing crisis of 2007 morphed into a global crisis by 2008 thanks to the significant US dollar liabilities of global banks. After Eurodollar lenders began doubting the creditworthiness of borrowers in 2008, fears grew that many banks would be unable to rollover their significant US dollar liabilities. At the time, many global banks were heavily reliant on US dollars borrowed from the Eurodollar market.
2010 – Mid-2012: The Eurozone crisis
Following the first stage of the global financial crisis, problems began appearing in the Eurozone. In late 2009, reports in the media suggested that the Greek government’s finances were much worse than initially imagined. Similar stories appeared regarding governments in Portugal, Ireland and Spain. As the largest holders of Eurozone government debt were German and French banks, fears grew that problems in the Eurozone’s periphery may cause a broader financial crisis. Despite several bailouts from the European Central Bank, the common currency began selling off.
This time the British pound served as a safe haven to the Eurozone’s troubles, and rallied in response. EUR/GBP fell from around 0.96 to 0.78 by mid-2012.
Mid-2012 – 2014: Whatever it takes
Following a few years of economic turbulence, the ECB was willing to consider unorthodox means to bring about stability to the region. In a conference in July 2012, ECB President Mario Draghi famously remarked that the ECB will do “whatever it takes” to save the euro. Following his speech, the Bank began a new program known as Outright Monetary Transactions (OMT). Under OMT, the Bank would have the power to purchase an unlimited amount of Eurozone government bonds. Following the announcement, Eurozone bonds began rallying and the crisis slowly dissipated.
Looking at the EUR/GBP exchange rate, it peaked around 0.87 in early 2013 and traded just above 0.84 in early 2014.
Early 2014 – late 2015: The US dollar comeback
After Draghi’s “whatever it takes” speech, it became clear that the ECB was willing to go to extreme lengths in order to maintain the Eurozone monetary union. In May 2014, the Bank began pursuing negative interest rates and quantitative easing (buying government and corporate bonds using the ECB’s balance sheet). Following this monetary ‘bazooka’, the euro began a steep sell-off. As the US was tapering its own quantitative easing program at this point, the US dollar soared relative to the euro.
Looking at EUR/GBP, the exchange rate fell from around 0.84 down to around 0.70 by late 2015. While the pound was broadly weaker during this time, the currency made gains against the euro.
Late 2015 – 2016
After making a long-term bottom around 0.70, the euro began gaining against the British pound by 2016. At the time, the common currency was gradually strengthening while the pound was selling off due to Brexit referendum fears. Following the referendum, in which the United Kingdom voted to leave the European Union, the pound sold off sharply. Looking at EUR/GBP, the pair peaked around 0.92 in early October 2016, but quickly gave up its gains.
In early 2017, markets were once again nervous regarding European politics. This time, the fear was that France’s Marine Le Pen may win the French presidential elections. Given her anti-European Union stance, many feared that the Eurozone as a whole may collapse if France were the leave the European Union. As such, EUR/GBP began selling off and bottomed around 0.84 prior to the elections in April.
Following the victory of Emmanuel Macron, who was seen as pro-European Union, the euro began rallying. For EUR/GBP, the pair once again hit its previous top around 0.92 in August 2017. Since then, the pair has weakened as the British pound has rebounded thanks to rising optimism for a trade deal. As both currencies have been driven by politics in 2017, we have written that trading EUR/GBP has been challenging given the difficult in forecasting politics. At times, we have also written that optimism in the pound has been quite stretched, as hopes for a deal have run ahead of expectations.