3 factors that affect the EUR/GBP pair

The EUR/GBP currency pair combines the euro (€, EUR), the official currency of the European Union, with the British pound (£, GBP) of the United Kingdom. The exchange rate between these two currencies indicates the number of British pounds required to purchase one euro. For instance, if the EUR/GBP rate is 0.7500, it means that 1 euro is equal to 0.75 British pounds.

Both the euro and the British pound are widely traded currencies, with the euro being the second most traded currency globally and the British pound ranking as the third most traded. Consequently, the EUR/GBP pair offers relatively high liquidity, making it popular among traders.

The spread, which refers to the difference between the buying and selling prices, can vary among brokers. Typically, the EUR/GBP pair maintains a spread ranging from 1 to 3 pips. This narrow spread may make it an appealing choice for scalping strategies, although its limited range, akin to the EUR/CHF pair, can present challenges.

Why is the EUR/GBP pair important?

When engaging in intraday trading with the EUR/GBP pair, it is important to note that it typically requires more patience compared to other currency pairs.
From a technical perspective, the correlation between EUR/USD and GBP/USD indicates that the volatility of EUR/GBP tends to be lower than that of the two major pairs mentioned.

Out of all currency pairs, the EUR/GBP has been significantly impacted by the ongoing discussions surrounding Brexit in the UK.

Currently, there is no consensus on how the Brexit situation will be resolved, and this uncertainty continues to influence the EUR/GBP pair. The currency pair is likely to be affected until a definitive resolution is agreed upon.

History of EUR/GBP

To gain a comprehensive understanding of the EUR/GBP pair and why it garners significant attention in trading, let’s delve into the background of these two currencies, their origins, and the historical context of the euro-sterling relationship.
The euro, as a relatively recent currency, has made remarkable progress since its initial introduction. Initially conceived as a fully digital currency in the late 20th century, the euro has now become the official currency for a substantial portion of the European continent.

The euro has encountered its share of challenges throughout its history. Following the US subprime mortgage crisis, Europe faced its own economic downturn, leading to significant price fluctuations in the euro due to various political and economic factors impacting the currency.

Although it wasn’t decimalised until 1971, the pound sterling’s history may be traced back many centuries to a time about 775. Currently, the pound sterling holds the position as the fourth most widely traded currency in the foreign exchange market and plays a significant role in global trading activities.

Historical events have had a notable influence on the value of the pound sterling. For instance, the depreciation of the US dollar in 1965 had an impact on GBP rates. Additionally, significant events such as the UK’s withdrawal from the Exchange Rate Mechanism in 1992 and the bursting of the dot-com bubble in 2001 resulted in price declines for the pound sterling.

Major factors affecting EUR/GBP

Several factors contribute to the fluctuations in the EUR/GBP price. These factors include central bank interest rates, press conferences, unemployment data, trade balances, inflation, GDP growth, sales data, market sentiment, and consumer confidence.
Although all these factors influence the price, the primary focus for many traders lies in central bank interest rates which play a crucial role in determining whether a currency appreciates or depreciates. A higher interest rate typically leads to currency appreciation, while a reduction in interest rates generally results in a currency’s depreciation.

The European Central Bank

The European Central Bank (ECB), headquartered in Frankfurt, oversees the management of the Euro currency. It is widely known as the ECB and its decisions regarding interest rates are closely monitored by investors trading Forex pairs involving the Euro and European indices.
In 2022, the ECB, along with several other central banks worldwide, initiated a series of interest rate hikes, marking the first increase in 11 years. The Euro faced challenges against the US dollar as the Federal Reserve implemented higher and more frequent interest rate hikes.

The Bank of England

The Bank of England (BoE), located in London, is responsible for the regulation of the Great Britain Pound and the formulation of monetary policy. Investors trading the British pound or British stocks closely follow the BoE’s interest rate decisions and the announcements made by its governor.
Similarly, in 2022, the Bank of England also began raising interest rates in alignment with many other central banks. However, a significant decline in the British pound occurred following a “mini-budget” announcement by a new government and chancellor in September 2022. This sudden drop led to a surge in the EURGBP exchange rate, with analysts predicting that the Bank of England would need to implement faster, and more substantial interest rate increases compared to the European Central Bank.

UK Parliament

The UK Parliament has played a pivotal role in causing significant fluctuations in the GBP price. Decisions and occasional political headlines originating from the UK parliament have been key drivers of these changes. The choices and conversations that affect the UK economy as a whole must be attentively watched since they are likely to have a significant impact on the EURGBP exchange rate.

How to trade the EUR/GBP currency pair?

Scalping

Scalping stands out as a highly favoured trading style, especially among those who trade currency pairs like the EUR/GBP. Scalping involves quick-paced and short-term trades, where traders aim to achieve profits through a large number of small trades.
Scalping the EUR/GBP is made convenient by the pair’s notably low spread, averaging around 1 pip and even as low as 0.3 pips. If you are an assertive speculator in the market, the low spread on the EUR/GBP is tailored for you. It helps minimize trading costs while offering the potential for quick gains when the pair moves favourably, allowing you to maximize your profits swiftly.

Swing Trading

Are you inclined towards trading significant movements and trends? The EUR/GBP holds appeal for medium and long-term traders, commonly known as swing traders, who aim to capture opportunities over several days or even weeks.

One notable consideration for swing traders is the swap, which refers to the daily interest charge incurred on trades held overnight. However, the swap fees associated with the EUR/GBP pair are relatively low and can even be positive, meaning you may receive interest instead of paying it. This aspect adds to the attractiveness of swing trading the EUR/GBP, providing potential benefits for traders in terms of reduced costs and the opportunity to earn interest on their positions.

Disclaimer:

This information is not considered investment advice or an investment recommendation, but instead a marketing communication. IronFX is not responsible for any data or information provided by third parties referenced or hyperlinked, in this communication.