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The EUR/GBP currency pair is one of the most widely traded in the world, measuring the value of the Euro currency in British Pounds. The relationship between the economies of the European Union and the United Kingdom is a tight one, yet one which has known its ups and downs over the years. While never endorsing the Euro currency, the United Kingdom was part of the European Union until it decided to break away following a referendum in 2016. Still, the two currencies are closely linked, can affect one another, and can both be influenced by factors relating to the European economy. Moreover, both currencies are heavily exchanged with the USD, which in a sense, puts them both on the same side of the global currency balance.
Currency traders: Since this is one of the most popular currency pairs, traders who deal with the foreign currency market may want to include EUR/GBP in their portfolios.
Day traders: Due to the volatility of the market, many short-term traders leverage these price fluctuations in an attempt to make a quick profit. Since it has high volume and liquidity, the EUR/GBP currency pair could be a good option for these traders.
USD traders: Currency traders who focus mainly on the greenback could also include EUR/GBP in their portfolios, as a means of adding diversity.
Fundamental analysts: Currency pairs are often influenced by news, events and financial reports. Therefore, those who base their trading strategy on fundamental analyses, and follow these releases closely, could consider adding EUR/GBP to their portfolio.
The physical proximity between the UK and the EU is the main reason these two economies are so involved in mutual trading. There’s a heavy flow of imports and exports in both directions, making both economies greatly dependent on each other. Moreover, the Brexit vote of 2016, which resulted in Britain’s divorce from the EU, has contributed to the volatility of both currencies, as each step in the negotiations has affected one or both of them. There are a number of factors that could influence the EUR/GBP instrument:
Interest rates: The British Pound is affected by the Bank of England’s monetary policy, most notably by rate decisions, and the Euro is similarly linked to the European Central Bank. Volatility is often experienced during and around the time either central banks announce interest rates.
Financial reports: Data such as GDP, employment, consumer price indices and others could impact each of the currencies. These reports are released periodically and there are many which could generate volatility.
The USD: The strongest currency in the world, the US Dollar is often measured in comparison to both of these currencies. Therefore, when it is stronger, it could weaken its European counterparts, and vice-versa.
Brexit: The full impact of Britain’s separation from the European Union could take years to materialize. The intricate, codependent relationship between both sides will most likely continue to be affected for years to come.
It is no secret that the British government was caught by surprise when the British people voted to part ways with the European Union in 2016. Then Prime Minister David Cameron resigned as a result and the British Pound crashed 15% to a 30-year low. Moreover, Theresa May, who replaced Cameron, decided to hold a snap election in an attempt to muster more support for the Brexit negotiations. However, her plan backfired, as the election left her with even less support, further adding to her challenges in trying to get the best possible deal for her country.
However, when the dust settled, both sides began working on redefining their mutual relationship. While the EU is the stronger side in the relationship, the UK still has great influence and could apply leverage in certain aspects of present and future trade agreements. Although it is no longer a part of the European Union, the UK is still a very active partner, and friend, of the Union, a fact which keeps the GBP and Euro closely linked.
The Euro currency was introduced into circulation in 2002. Before that, each member of the European Union had its own currency. However, when the Euro entered into circulation, several members decided not to adopt the currency, including the UK. Instead, Britain decided to maintain its long-time currency, the Pound Sterling. However, seemingly overnight, numerous currency pairs became obsolete and the Pound now had one main rival on the other side of the English Channel. Since it was now in use in major economies, such as Germany, France and Italy, the Euro became a force to be reckoned with in the global currency market.
Despite never adopting the Euro, the UK’s departure from the EU still had a great impact on the British Pound. Regardless of how comfortable trading agreements signed are on both sides, they are still no match for being part of the same economy. However, the decision has been made and the UK and the EU are separate entities. Since both economies, and subsequently, their currencies have such a close relationship, it is safe to assume that they will both be susceptible to the same market events that impact the global economy. Moreover, as both currencies are heavily exchanged with the USD, if it gains strength, the two could weaken in tandem.
Despite being rival currencies, their physical proximity, and cultural similarities make them sensitive to the same factors. Therefore, the relationship between the British Pound and Euro is one of rivalry, codependency andcamaraderie.
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*This content is for information and educational purposes only and should not be considered investment advice or an investment recommendation.
*Past performance is not an indication of future results.
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