The British pound (GBP) to the euro (EUR), the popular minor forex pair, has rallied 7% so far this year as the Bank of England (BoE) and the European Central Bank (ECB) took diverging paths.
Could there be more upside for the pair?
In this article, we recap the latest pound to euro news, analyse the pair’s rate fluctuations from both fundamental and technical perspectives, and check out what the GBP/EUR forecast looks like from FX analysts.
What you need to know about GBP/EUR performance
The GBP/EUR rate plunged when Covid-19 hit both the UK and EU. Investors fretted over what the pandemic and resultant lockdowns would do to national economies. On 19 March 2020, the pair tumbled to an intraday low of 1.0526, a level last seen in 2009, according to the GBP/EUR graph.
Thanks to the rapid rollout of a Covid-19 vaccine programme, optimism around the UK economy picked up, boosting the pound. GBP/EUR rallied to start this year at 1.1220, a near 7% gain from its pandemic low.
The pair continued to build on those gains, reaching a high of 1.1935 on 23 November, a level last seen pre-pandemic in February 2020. However uncertainty over how the emergence of the Omicron variant and the subsequent restrictions will affect the economy have taken off some of the shine. At time of writing (15 December) the pai stands at 1.17613.
What was driving the pair higher?
The principal driver, strengthening the pound and weighing on the euro, has been central bank planning. Both the UK and the eurozone are experiencing a steady economic recovery from the pandemic. Both are also experiencing elevated levels of inflation, but the two regions’ respective central banks are adopting different stances, which is affecting currencies.
Let’s take a closer look.
The UK economy has been recovering rather well from the pandemic. After GDP fell by 10% in 2020, the worst contraction in 300 years, the economic rebound has been solid. According to the latest GDP reading from the Office of National Statistics (ONS), the UK economy grew by 2.9% in the three months to August. The economy remains 0.8% below pre-pandemic levels.
But inflation is up. In the latest ONS release, the cost of living in the UK, as measured by the Consumer Price Index (CPI), rose by 3.1% in the 12 months to September 2021 compared with last year. That’s slightly down on the 3.2% recorded in August. However, inflation is still expected to climb higher across the remainder of the year and beyond. Today (15 December) inflation for the year to November was announced as 5.1%, a ten year high. There is keen interest in whether the Monetary Policy Committee which meets tomorrow will respond to the pressure and raise interest rates.
Until recently, the BoE has been insistent that elevated inflation would be transitory. However, over the past few weeks, the UK’s central bank has adopted a more hawkish tone, voicing concerns that inflation could remain higher for longer and may require action to bring it under control.
On 21 October, according to CME’s BoEWatch Tool, the probability of an interest rate hike by the UK’s central bank at the December meeting was 70%, up from 8.7% one month ago. It currently postulates there is no chance of a change.
The ECB is in no rush to hike interest rates
The eurozone economy contracted by 6.1% in 2020. Economic growth has also rebounded, albeit at a slightly slower rate than in the UK. The recovery began later after a delayed start to the EU’s vaccination programme and a fourth wave of Covid-19 hit the continent.
In the most recent data from Eurostat, the euro area experienced economic growth of 2% after contracting 0.3% in the first three months of the year. While third-quarter GDP data is yet to be released, the Purchasing Managers’ Index (PMI) suggests that it was a strong quarter for economic activity, with the index remaining firmly above 50, which separates expansion from contraction.
Inflation in the eurozone has also risen. According to the CPI, it’s risen at a faster pace than in the UK, hitting 3.4% in September, up from 3% in August. In Germany, inflation reached 4.1%, the highest level in 13 years.
In a similar story to the UK, eurozone inflation has risen sharply on the back of surging energy costs and supply chain disruptions, and also amid the reversal of a temporary VAT reduction in Germany. Despite rising inflation, the ECB has not adopted a more hawkish bias, like the UK.
Minutes from the latest ECB meeting revealed that policy makers considered that underlying inflation was subdued. Indeed, core inflation, which strips out more volatile items such as food and fuel, rose to 1.9% in September, which is below the ECB’s target 2%.
In her latest speech at the 44th meeting of the International Monetary and Financial Committee, ECB President Christine Lagarde reiterated expectations that any rise in inflation is temporary. The central bank believes it will revert to 2% over the medium-term.
GBP/EUR technical analysis: what does the chart tell us?
GBP/EUR has extended its rebound off the 200-day simple moving average (SMA) tested on 30 September. The break above previous resistance at 1.1834 in addition to a bullish Relative Strength Index (RSI) is keeping buyers optimistic of possible further gains.
Immediate resistance is seen at 1.1871, the recent 20-month high. A breakthrough here could open the door to 1.1930, the January 2020 high, and 1.2000, the key psychological level.
On the flip side, it would take a move below 1.1830 to expose the 50-day SMA at 1.1710. A break below this level could see sellers gain traction towards the 200-day SMA.
GBP/EUR outlook: where do analysts see the pair going in 2021 and beyond?
Analysts at ING, in their recent analysis highlight the fact that ECB policy makers are sticking with the view that rising inflation is transitory. They believe it would take a change in tone from Lagarde or the ECB’s Chief Economist, Philip Lane, for a re-pricing of the euro. They say:
In the meantime, they suggest that the pound could continue to strengthen against the euro towards the end of the year and into 2022. In their EUR/GBP outlook, which is the reverse of GBP/EUR, their prognosis is that the exchange rate could weaken to 0.84 by the end of the year and continue falling to 0.82 by the end of next year.
John Woolfitt, director of trading at Atlantic Capital Market, also draws on central bank divergence in his pound to euro prediction. In a note to Capital.com, he wrote:
Fiona Cincotta, senior market analyst at City Index, noted in an email to Capital.com: “Both the eurozone and the UK are experiencing high levels of inflation, well above the central banks’ target level. Whilst the BoE are suddenly very keen to tighten monetary policy, the ECB are dragging their heels.
According to the GBP/EUR forecast provided by algorithm-based website Wallet Investor, the pair is likely to hold steady in the near term. On 15 December, the service predicted that GBP/EUR could start 2022 at 1.166. Over the longer term, its pound to euro expectations are for the pair to close 2022 at 1.187, 2023 at 1.195 and 2024 at 1.202, before easing back slightly in 2025 to close the year at 1.21.
Note that this article does not constitute financial or investment advice. Keep in mind that analysts and online forecasting sites can and do get their predictions wrong.
We recommend that you always do your own research and consider the latest market trends and news, technical and fundamental analysis, and expert opinion before making any investment decisions. Also, keep in mind that past performance is no indicator of future returns. And never invest money you cannot afford to lose.
The pound has risen more than 7% against the euro so far this year, with GBP/EUR having recently traded at a 20-month high. Whether the pair will book more gains will depend on, among other factors, whether the BoE raises interest rates sooner rather than later and whether the ECB remains comparatively cautious.
You should do your own research and keep in mind that past performance is no indicator of future returns.
One of the main factors that drive GBP/EUR is the economic health of the respective countries (in this case, the UK and the euro area). When there is divergence between the state of the economies and two central banks’ chosen paths, one currency will advance against another. A strong post-pandemic economic rebound in the UK and a BoE ready to raise interest rates could boost the pound against euro, if the ECB is not looking to tighten policy at the same rate.
You can trade forex pairs 24/7. However, one of the most popular times to trade GBP/EUR is usually during the European trading hours, which run from 07:00 to 16:00 GMT. To narrow this time frame down further, most UK and eurozone monthly data is released within the first three hours of trading.
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You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
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