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.
The euro is mixed today. The common currency is selling off against the US dollar and the British pound, while making gains versus the the Australian dollar and the Japanese yen. Yesterday, the euro strengthened against the US dollar following significant weakness. Today, the currency has resumed weakening as the spread between US and Eurozone bond yields trades near all-time highs.
Turning to recent news and events, German IFO expectations were significantly below estimates and slowed from previous monthly figures. As Eurozone sentiment data weakens, the outlook for growth this year is worsening as a result. In a previous commentary on the euro, we wrote that decelerating economic growth will ultimately force the ECB into more accommodative monetary policy. Yesterday, we published a preview of the upcoming ECB meeting (scheduled for tomorrow). We argue that the Bank is unlikely to communicate any change in forward guidance (or hint at ending its asset buying program later this year). Instead, we argue that Draghi will buy more time to see if growth continues to decelerate this year. Our short-term outlook on the euro is bearish, while our medium-term outlook is neutral.
EUR/USD is down slightly and trading above 1.2210. The euro is up slightly against the yen, with EUR/JPY trading above 133.20. Finally, the euro is down against the pound, with EUR/GBP above 0.8740.
Looking at this week’s economic events from the Eurozone, the most important event includes an upcoming ECB interest rate decision. Eurozone manufacturing PMIs for April (56 vs 56.1) were below expectations. Services (55 vs. 54.6 expected) and composite (55.2 vs. 54.9 expected) PMIs were ahead of expectations. German IFO expectations for April (98.7 vs. 99.5 expected) were significantly below estimates. Tomorrow, the most important day, we’ll see the ECB’s latest interest rate decision and hear from ECB President Draghi. We’ll also see May GfK consumer confidence from Germany. On Friday, we’ll get German unemployment figures. We’ll also see a range of sentiment data from the Eurozone for April (services sentiment, economic sentiment, business climate, industrial confidence and consumer confidence). Last week, the ZEW sentiment survey for April was below estimates.
Pound sterling is higher against all major currencies except the US dollar today. The British pound is currently the strongest versus the Australian dollar and the Japanese yen. Yesterday, the pound rebounded after news regarding a possible takeover of British pharmaceutical company Shire by Japanese competitor Takeda Pharmaceutical. Significant business investments can temporarily drive a currency higher.
Turning to recent news and events, there are a limited number of developments from the UK driving the currency today. Instead, the pound is trading as a function of international developments. Specifically, the euro is weakening thanks to poor Eurozone growth data, while the US dollar is strengthening thanks to rising US bond yields. While the pound's historically cheap valuation (relative to other major currencies) is one reason to buy the currency, slowing regional growth and US dollar strength is hurting the rally. Our short-term outlook on the pound is now neutral, while our medium-term outlook on the pound remains bullish
GBP/USD is currently above 1.3960. EUR/GBP is down slightly, with the exchange rate above 0.8740. The pound is up slightly against the Australian dollar and flat against the Canadian dollar. GBP/AUD is currently above 1.8440, while GBP/CAD is above 1.7940.
Looking at this week’s economic data from the United Kingdom, traders will be watching upcoming Q1 GDP growth figures. Public sector borrowing figures for March (-£0.262b vs. £1.600b expected) beat expectations. On Friday, the most important day, we’ll get Q1 GDP growth. We’ll also see GfK consumer confidence for April as well as Nationwide housing price growth for April. Last week, March inflation figures were below estimates while Governor Mark Carney downplayed the possibility of a rate hike in May.
As the pair runs out of steam, we are now neutral on EUR/GBP. The pair is currently trading within normal conditions. This is based on technical indicators on a daily chart.
As EUR/GBP weakens, we are downgrading the pair in the medium-term to bearish. The currency pair is now trading within normal trading conditions. This is based on technical indicators when looking at a weekly chart.
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 take on the euro in late February, we wrote that the bullish case for the currency was looking increasingly challenging. At the time, euro speculators were spooked by slowing forward-looking economic indicators, while upcoming political events in Italy and Germany risked the future unity of the region. While our outlook remains mildly bullish, this comes with the significant cavea…
Improving growth and falling political risk are pushing the Euro higher, but constant changes in the landscape put this movement at risk. Significant declining trends will impact the euro forecast - and speculators and traders should take note of the increased risk.
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…
Looking at the British pound today, concerns regarding Brexit and the stock market rout are outweighing the Bank of England’s positive economic outlook. As a currency that benefits from rising risk appetite, pound sterling has been selling off sharply in February thanks to fears regarding elevated asset prices. While Bank of England Governor Mark Carney helped the pound last Thursday after saying…
In our last take on the British pound in early January, we wrote that the currency was set to keep strengthening thanks to strong regional growth, moderate sentiment and the historically low value of the pound. More specifically, the currency looks cheap based on broad nominal effective exchange rates (a measure of the pound relative to other foreign currencies). Looking at GBP/USD since our last…
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.