The British pound (GBP) has steadily gained against the euro (EUR) across the year. By 14 July, the pair had traded up over 4.5% since 1 January, booking gains in every month except April.
But what’s been behind moves in the pair’s exchange rate, and what’s the prognosis?
In this article, we look at factors to consider when trading GBP/EUR, and the pound/euro exchange rate forecast for 2021 and heading towards 2022.
The basics: everything you need to know about the GBP/EUR pair
The GBP/EUR pair represents how many euros, the quote currency, are required to buy one pound.
The pound, or sterling, is the official currency of the United Kingdom and British Overseas Territories. It’s the world’s oldest currency still in active use. It’s the fourth most-traded currency in the forex markets, trailing the US dollar, euro and Japanese yen. The pound is also the fifth most-held reserve currency.
The euro is the official currency of 19 of the 27 member states in the European Union (EU). These countries make up the Eurozone. The euro was created to facilitate cross border transactions and business within the EU, and is often considered a proxy for the health of the Eurozone’s economy. It’s one of the largest reserve currencies in the world and the second most-traded, after the US dollar.
Factors that influence the GBP/EUR pair
Central bank action and rhetoric plays a key role in driving the pound/euro exchange rate. Any hints, clues or signs that central banks could loosen or tighten monetary policy can drive movement in a currency pair.
For example, should the Bank of England (BoE) look at tightening monetary policy by tapering asset purchases or raising interest rates, it could boost the pound’s value against the euro.
Likewise, an extension to a bond buying programme or a cut in interest rates from the European Central Bank (ECB) could drag the euro lower.
Central banks monitor macro-economic data in order to make monetary policy decisions. As a result, GBP/EUR is influenced by macroeconomic data. The pound/euro rate is driven by data from the Eurozone and the UK. Data from Germany can also drive movement in the euro because it’s the largest economy in the Eurozone.
Ongoing Brexit talks and relations with the EU continue to play an important role in driving movement, particularly in the pound. When EU relations take a turn for the worst, or trouble flares in Northern Ireland over Brexit, sterling often comes under pressure.
Over the past 15 months, the pandemic and its impact on the UK economy has also been an important driver of the pound/euro rate.
Forex traders watch GBP/EUR news carefully for political, economic and Brexit related updates.
The latest GBP/EUR rate analysis
Looking back to the start of 2020, the pound/euro exchange rate was hovering around 1.1800. The pair fell more than 12% from 1.2000 in mid-February to an intraday low of 1.0526 in mid-March as the COVID-19 pandemic hit the UK. As infections rose in Britain across February and March, fear and uncertainty sent the pound tumbling.
The pair then recovered some of its losses as infections spread to Europe, with the rate mostly fluctuating between 1.09 and 1.11 for the rest of 2020.
The pound/euro exchange rate has trended higher across the year. The pair started 2021 at 1.1220, rapidly dropping to 1.1077 on 5 January and soared to an intraday high of 1.1803 on 5 April, as the pound strengthened. On 14 July, the GBP/EUR rate closed the day at 1.1720.
After Brexit, uncertainty surrounding the UK’s future started to ease. A clearer outlook combined with the UK ramping up its COVID vaccination programme rapidly lifted sterling. In sharp contrast, vaccine rollout in the European Union was very sluggish, not getting off the ground until well into the second quarter of the year.
Europe was hit by a third wave and more lockdown restrictions in the second quarter of the year, which kept the euro under pressure. Meanwhile, the UK’s successful and rapid vaccine rollout meant that Britain was able to press ahead with the easing of pandemic restrictions and the reopening of the economy. In April, the UK’s non-essential retailers threw open their doors and outdoor hospitality reopened. In May, indoor hospitality restarted with bars, pubs and restaurants offering indoor service.
But COVID restrictions were not lifted in Germany until June.
Macro-economic data has been firmer in the UK thanks to the economy’s earlier reopening. Furthermore, concerns are rising that economic recovery in the Eurozone could slow as COVID’s Delta variant spreads. And Germany is facing a slowdown in industrial production as supply chain issues and chip shortages hit industry.
As far as central bank policy is concerned, both the Bank of England and European Central Bank have been accommodative throughout the pandemic. The ECB recently adopted a new price stability strategy, moving its inflation target to 2%, up from “just below, but not at 2%”. The central bank also said that it would allow an inflation overshoot. This means that the bar for increasing interest rates has been raised, a dovish move that’s weighed on demand for the common currency.
In its latest central bank meeting, the BoE upgraded its inflation and growth outlook but voted 8-1 in favour of keeping the bond asset programme at its current level.
Inflation in the UK is rising sharply. In June, the consumer price index rose to 2.5%, up from 2.1% in May and well over the BoE’s 2% target. The BoE insists that any spike in inflation is transitory. However, it’s tapering the pace of bond purchasing, and is less dovish than the ECB.
Where do analysts see the pound going from here? Let’s take a look at some of the latest GBP/EUR predictions for the rest of the year and beyond.
GBP/EUR forecast: can the pound extend gains versus the euro as the vaccine advantage eases?
Nomura remains upbeat over the GBP/EUR outlook. Last month, analysts at the investment bank said that they “expect GBP to outperform” against the euro.
In its pound to euro prediction, Danske Bank is similarly bullish surrounding the GBP’s prospects. The Scandinavian bank expects to see an ongoing shift in the BoE stance from a dovish to a more hawkish position.
Mikael Olai Milhøj, chief analyst with Danske Bank, noted: "The BoE is tapering the bond buying pace, signalling that QE [Quantitative easing] may not be extended further (bond buying is set to expire by year-end). The first 15bp rate hike, which would take the Bank Rate back to 0.25%, is now priced in by November 2022."
Milhøj’s pound to euro prediction sees the pair reaching 1.2050 in the next 12 months, although in the near term, he expects the pair to trade at current levels.
David Madden, market analyst at Equiti Capital, said: “GBP/EUR has been in an uptrend throughout 2021 as the UK’s vaccination programme has outperformed that of the eurozone and in turn Britain’s economic rebound has been more robust.”
In his GBP/EUR technical analysis, Madden added that “while GBP/EUR holds above the 1.16 mark, the recent uptrend could continue, a break above 1.18 could bring 1.20 into play.”
However, not all analysts are so upbeat about the sterling to euro outlook.
RBC Capital expects to see notable declines in the pound’s value. Its pound to euro forecast sees the pair ending the year at 1.1236. Chief currency strategist Adam Cole said: “Going forwards, we think the risks are shifting to the downside, though timing is difficult.”
Cole highlighted the end of furlough payments and other support schemes as potential headwinds for sterling.
Whether the pound rises against the euro will depend largely on the direction of BoE and ECB monetary policy, which depend on the strength of the post-pandemic recovery and whether the recent spike in inflation is temporary.
The GBP/EUR rate is influenced by the economic performance of the UK and Eurozone, in addition to the BoE’s and ECB’s monetary policy.
The best time to trade GBP/EUR is during the main trading day in the UK and Europe, when the market is most liquid and the most relevant data is released.
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Trading CFDs offers the opportunity to capitalise on both bullish and bearish fluctuations. You can either hold a long position, speculating that the pair’s rate will rise, or take a short position, speculating that it will fall.
Trade Euro / British Pound CFD
As a leveraged product, CFDs are designed to maximise gains, which can be large on volatile assets such as forex pairs. However, you should be aware of the high risk involved because CFD trading also magnifies losses should the pair’s rate moves against your position.
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