EUR/GBP: How the euro-pound evolution defines new trading opportunities

The EUR/GBP pair remains one of the most dynamic and watched currency instruments in international markets. After recent movements that have pushed the quote to new lows, many traders are reconsidering their strategies regarding this cross, which has historically generated interesting opportunities. But what truly explains the current behavior of the pound against the euro?

From 1.30€ to 1.12€: The pound’s journey over a decade

The recent history of the pound-euro evolution is undoubtedly the story of Brexit. Before the 2016 referendum, the GBP/EUR pair traded comfortably above 1.30€. That vote change marked a radical turning point.

Since then, the pound has navigated turbulent waters. The most dramatic fall occurred immediately after the referendum result, when the sterling experienced its worst day in three decades. But that was just the first blow. In 2017 and again in 2019, other significant drops occurred, pushing the pound-euro quote to new lows against the euro and other key currencies.

What was happening in the market? Financial institutions, anticipating greater trade frictions and persistent political uncertainty, began to sell assets denominated in pounds sterling in a coordinated manner. When the supply of pounds increases and demand decreases, the price inevitably falls.

In early 2022, the situation seemed to improve slightly, with the exchange rate approaching again the top of the 5-year range (near 1.21€). However, since mid-year, the quote has retreated toward the lower end. By mid-January 2023, the pound hit 1.124€, levels not seen since the previous September.

Current key data: In early February 2023, the quote closed at 1.120€, reflecting a 1.45% decline in the last month and a 2.03% drop over the past three months.

The real drivers behind EUR/GBP fluctuations

It’s not enough to blame everything on Brexit. The pound-euro evolution responds to multiple factors operating simultaneously in the market.

Macroeconomic indicators: GDP, inflation, unemployment rates, and manufacturing activity are the data that truly move currencies. Investors constantly evaluate which economy offers better prospects, and this analysis is reflected in the demand for its currency.

Divergent monetary policies: The Bank of England and the European Central Bank face similar dilemmas but with potentially different responses. Both entities have raised interest rates to combat inflation, but any significant divergence in their future decisions could alter the balance of the EUR/GBP pair.

Economic forecasts matter: According to recent data from international organizations, the UK’s growth for 2023 is expected to be almost zero, while the eurozone maintains somewhat more positive growth prospects. This gap in expectations naturally pressures the pound downward against the euro.

Market sentiment: Perhaps the most volatile factor. Uncertainty about the long-term consequences of Brexit, combined with global concerns (such as the Russia-Ukraine conflict and its impact on inflation), creates a risk-averse environment that historically favors “safe haven” currencies like the euro over the pound.

Liquidity: The characteristic that differentiates EUR/GBP

A technical detail traders cannot ignore is that the GBP/EUR pair is highly liquid, while its inverse (EUR/GBP) is less so. This difference causes price deviations that widen during periods of extreme volatility. This deviation is useful for analysts seeking to project future movements of the cross.

Practical strategies for trading the pound-euro evolution

Understand the mechanics of the pair

If you trade GBP/EUR, remember you are buying pounds and selling euros. Each quote point represents how many euros you need to buy one pound. A low rate (like the current 1.12€) means the euro is relatively strong. For those looking to buy euros with pounds, this is not the best moment in the cycle.

Synchronize with the London session

Although the forex market operates 24/5, the EUR/GBP experiences its highest volatility during London trading hours (08:00 - 17:00 local time). About 35% of the total daily forex volume occurs here. Trading outside these hours means fewer opportunities and potentially wider spreads.

Monitor the economic calendar

Any major announcement from the UK or the eurozone can move the exchange rate. UK employment figures, inflation expectations data, and monetary policy statements from the Bank of England are key moments to take positions or adjust exposure.

Analyze trends with technical tools

Don’t speculate without structure. Use trend indicators and chart analysis to identify patterns. The 52-week historical range (1.0786€ - 1.2190€) serves as a reference for expected volatility.

What does the future hold for GBP/EUR?

The pound-euro evolution will continue to be driven by macroeconomic factors and monetary policies. The UK is expected to face recession in the coming quarters, with an anemic recovery projected for 2024. Inflation could reach 11% in that horizon.

Meanwhile, the recent cautious stance of the Bank of England acts as a drag on the currency. However, not everything is bleak: stronger employment figures could reverse sentiment if job creation remains resilient.

In conclusion, the EUR/GBP pair offers trading opportunities for those who understand its dynamics. The pound-euro reflects the complexity of global markets, where politics, economics, and sentiment intertwine. Keeping a close eye on economic news, respecting high-volatility hours, and applying rigorous technical analysis are key to successfully navigating this cross.

2023 reference range: Expect movements within the established range, with key points at 1.08€ in support and 1.21€ in historical resistance. The next major catalyst will be the upcoming Bank of England rate announcement.