EUR/GBP Currency Pair Trading Explained

The EUR/GBP currency pair, denoting the exchange rate between the Euro and the British pound sterling, holds a pivotal position in the realm of Forex trading.

Reflecting the economic dynamics of two major European economies, the United Kingdom and the European Union, this cross pair is characterized by the Euro as the base currency and the GBP as the quote currency.

The EUR/GBP pair typically maintains a stable price compared to other currency pairs, mainly owing to the smooth flow of capital between these economies. In this article, we delve into the intricacies of the EUR/GBP pair, exploring its historical significance, trading dynamics, influential factors, and why trading Contracts for Difference (CFDs) in EUR/GBP presents an appealing opportunity for traders seeking a blend of liquidity, correlation advantages, and cost efficiency in their trading endeavors while at the same time accepting the risks involved in the CFD trading.

What Is the EUR/GBP Currency Pair?

The EUR/GBP is the exchange rate symbolizing the Euro to British pound sterling, representing two major European economies, the UK and the EU. It's referred to as a 'cross pair' in Forex trading, with the EUR as the base currency and GBP as the quote currency, reflecting the amount of GBP needed to exchange one euro. The pair is known as 'Chunnel', referencing the Channel Tunnel connecting the UK and France. Compared to other currency pairs, EUR/GBP typically maintains a relatively stable price due to the smooth flow of capital between these economies.

Euro & Pound History

While the Euro and the pound are both important currencies on the world stage, the history of the British national currency is much longer.

The British pound, established as the official currency of the United Kingdom in 1707, has a long history dating back to its use as money in 760. Initially handwritten by the Bank of England until 1855 when banknotes became printed. The pound's influence extended to British colonies like Australia, New Zealand, and Canada, and it was tied to the gold standard before World War I to determine its value.

Throughout history, the pound underwent significant changes, including abandoning the gold standard during World War I and reinstating it post-war in 1925, only to abandon it again during the Great Depression. In 1971, the pound was allowed to float freely and its value determined by market forces. Despite the common adoption of the euro in most European Union nations in 2002, the UK retained the GBP as its official currency.

Recent legislation, notably the 2016 Brexit referendum, led to the UK's decision to leave the EU, causing a significant decline in the pound's value. Since then, its value has fluctuated in response to trade negotiations and economic uncertainties.

In contrast, the Euro only came into existence in 1999, although proposals for a European Union-wide currency had been floated since the 1960s. In the early years of the century, concerns rose about the viability of the Euro as it struggled against the Dollar. However, the transition from national currencies to the Euro is generally considered to have gone relatively smoothly, and the currency’s value was on the rise up to the financial crisis of 2007-2009.

The Euro’s value was affected by both the recession and the ECB's 2015 Quantitative Easing program impacting its value, but it has continued to expand its reach and is now used in 19 out of 28 EU countries, solidifying its significance in the global economy.

Why Is the EUR/GBP Pair Important?

EUR/GBP holds significant importance for two primary reasons. Firstly, it stands as a pivotal currency pair within the foreign exchange market, ranking as the third most-traded pair following EUR/USD and USD/JPY. This prominence underscores its influence and activity within global currency trading. Secondly, EUR/GBP serves as a symbolic representation of the economic ties between two major economic players – the United Kingdom and Germany. As the UK and Germany stand among the largest economies in Europe, their economic relationship carries substantial weight, impacting not only their respective currencies but also broader economic trends within the region. Therefore, fluctuations in the EUR/GBP exchange rate can reflect shifts in the economic dynamics between these nations, providing valuable insights for investors, policymakers, and analysts navigating the intricacies of the European financial landscape.

How Does Trading on the EUR/GBP Look?

Let’s say the EUR/GBP pair is currently trading at 0.85120 / 0.85130.

You decide to purchase €15,000 because you foresee an upward trend. With a margin rate of 3.33%, you're only required to deposit 3.33% of the total position value as position margin. Therefore, in this instance, your position margin equals £425.20 (3.33% x [€15,000 x 0.85125]).

It's crucial to recognize that in case the price moves unfavorably, there's a possibility of losing more than your initial investment of £425.20. Now let’s look at two possible trading outcomes:

Profit

Your prediction turns out correct, and within the following hour, the price rises to 0.85650 / 0.85660. Opting to close your long trade, you sell at 0.85650 (the current sell price).

The price has increased by 53 pips (0.85650 – 0.85120) in your favor.

Consequently, your profit amounts to ([€15,000 x 0.85650] – [€15,000 x 0.85120]) = £79.50.

Loss

Unfortunately, your prediction proves incorrect, and the EUR/GBP price decreases within the hour to 0.84800 / 0.84810. Anticipating further downtrend, you decide to sell at 0.84800 (the current sell price) to close the trade and limit losses.

The price has moved against you by 32 pips (0.85120 – 0.84800).

Hence, your loss totals ([€15,000 x 0.85120] – [€15,000 x 0.84800]) = -£48.

Factors Affecting the EUR/GBP

Given this Forex pair’s centrality below are some key factors influencing the EUR/GBP exchange rate that warrant close observation:

Market Sentiment

Short-term fluctuations in the EUR/GBP rate can stem from investor and trader sentiment influenced by news, rumors, and global economic events. In general, currencies will appreciate, or increase in value, when market sentiment toward them is positive, and the opposite will occur when traders’ opinions toward their prospects are less so.

Trade Relations

Trade relationships and agreements between the Eurozone and the UK also affect exchange rates. Changes in trade policies and disputes between the two entities impact their currencies. Positive developments in trade relations can boost economic prospects, strengthening these currencies, while trade disputes or negative alterations in agreements can have negative effects.

Interest Rate Dynamics

Central bank policies, particularly adjustments in interest rates greatly impact currency pair fluctuations. Higher interest rates in one country generally attract foreign capital, strengthening its currency, while lower rates or indications of future decreases can drive investors elsewhere, usually weakening the currency. Monitoring changes in policies by institutions like the European Central Bank (ECB) and Bank of England (BoE) is essential to anticipate shifts in the EUR/GBP rate.

Economic Indicators

Various economic metrics such as GDP growth, inflation rates, employment figures, and trade balances significantly impact exchange rates. Positive economic indicators, like robust GDP growth or low unemployment rates, can strengthen a currency. For instance, if the Eurozone outperforms the UK economically, the Euro may appreciate against the Pound.

Political Events

Political occurrences like elections, referendums, and governmental stability influence market sentiment, affecting exchange rates. Notable political uncertainties, such as those seen during Brexit negotiations, induce volatility and adverse effects on currencies.

In addition to these events that exert an influence on EUR/GBP trends, correlations with other Forex pairs can be observed. Over time, a positive correlation between EUR/GBP and three other Forex pairs has been observed: CHF/SGD, USD/MXN, and USD/SGD. This means that all four pairs tend to rise at the same time. Conversely, a negative correlation has been seen between the EUR/GBP and three further pairs: GBP/CHF, GBP/JPY and GBP/NZD. Accordingly, when the EUR/GBP rises, these three tend to fall and vice versa.

Why Trade CFDs in EUR/GBP?

The EUR/GBP currency pair is distinguished within the Forex market by its significant trade volume and high liquidity, and minimal slippage. This advantageous trading environment fosters a seamless and cost-effective experience for participants.

One notable benefit of trading the EUR/GBP pair stems from its strong correlation with other major currency pairs, offering opportunities for effective hedging strategies. By leveraging this interconnectedness, traders can mitigate risks and safeguard their positions in the market.

The ever-changing dynamics of the EUR/GBP exchange rate, influenced by political and economic events, create opportunities for traders to capitalize on news-driven volatility. With careful analysis, traders can potentially anticipate market movements and make more informed informed decisions to potentially profit from fluctuations.

A key feature of the EUR/GBP is its consistently narrow bid-ask spreads, translating to lower trading costs for CFD traders, when compared to other CFD trading pairs or instruments. This reduction in trading expenses enhances the profit potential of trades, making the EUR/GBP an attractive option for those seeking cost-efficient and potentially lucrative opportunities.

The EUR/GBP's significant trade volume, liquidity, correlation with other major currency pairs, susceptibility to news-driven volatility, and consistently narrow bid-ask spreads for CFD traders collectively make it an appealing asset for traders. Depending on each person’s trading philosophy, these characteristics can foster a favourable trading environment and offer diverse strategies for traders to explore in their quest for successful and profitable outcomes.

However, trading CFDs on the EUR/GBP Forex pair also carries several risks with which traders must familiarise themselves. Firstly, currency markets can be highly volatile, subject to sudden fluctuations due to economic indicators, geopolitical events, and market sentiment, amplifying the potential for significant losses. Additionally, CFDs typically involve leverage, allowing traders to control larger positions with a fraction of the capital, which magnifies both potential gains and losses. The EUR/GBP pair itself may exhibit specific volatility, influenced by factors such as Brexit developments, Eurozone economic data, and UK monetary policy decisions. It's essential for traders to conduct thorough research, implement risk management strategies, and consider their risk tolerance before engaging in CFD trading on the EUR/GBP pair.

Conclusion

In conclusion, the EUR/GBP currency pair stands as a cornerstone of the Forex trading landscape, embodying the economic interplay between two powerhouse European economies, the United Kingdom and the European Union. With its designation as a cross pair, denoting the Euro as the base currency and the GBP as the quote currency, the EUR/GBP pair reflects the ongoing exchange dynamics between these regions.

Often recognized as the 'Chunnel', it signifies the interconnectedness facilitated by the Channel Tunnel between the UK and France. Amidst the historical backdrop of the British pound's enduring legacy and the Euro's more recent emergence, the EUR/GBP pair has weathered significant events such as the Brexit referendum, showcasing resilience amidst economic uncertainties. As the third most traded pair in Forex markets, its importance transcends mere trading activity, serving as a symbolic representation of the economic ties between the UK and the EU.

Furthermore, its susceptibility to various influencing factors, from market sentiment to interest rate dynamics and political events, underscores its relevance as a barometer of broader economic trends. Whether through traditional trading or Contracts for Difference (CFDs), the EUR/GBP pair offers traders a compelling blend of liquidity, correlation advantages, and cost efficiency, making it a perennially attractive avenue for pursuing profitable trading strategies amidst the complexities of the global financial landscape.

FAQs

When can I trade EUR/GBP?

EUR/GBP, like other Forex pairs, is available for CFD trading from Sunday evening to Friday evening.

What factors affect the EUR/GBP exchange rate?

The EUR/GBP can be affected by a wide range of factors, from political changes in the U.K. and Eurozone, to general macroeconomic factors and market sentiment.

How can I manage my risk when trading EUR/GBP CFDs?

You can manage your risk by using our Trailing Loss, Stop Loss, Stop Limit, and Guaranteed Stop tools.

Is EUR/GBP volatile?

The EUR/GBP has been more volatile since Brexit in 2015.

Are GBP and EUR correlated?

The British pound and the Euro are generally correlated mainly due to the integration of the British and European economies and their status as widely-held reserve currencies.