The EURGBP pair resembles an island in the forex sea in that it often has its own dynamics and trends that do not correlate very strongly to other popular currencies. Here we discuss the backgrounds of the two currencies, factors influencing their trends, and conclude with a few tips on how to trade them. Check the live EURGBP flash chart below is available for study, we proceed to discuss the subject in greater detail in the following sections.
Circulating since January 1st 1999, Euro is the currency of the Eurozone, which is an economic area comprised of EU-member nations that have met the convergence criteria and adopted the Euro in place of their respective national currencies. The interest rates governing Euro trends are set by the European Central Bank (ECB) in Frankfurt.
The Pound Sterling
The most prestigious currency of the world for much of the 19th century, the sterling partook in the fortunes of the British Empire, and as the latter descended to a state of bankruptcy in the aftermath of the First World War, the pound lost much of its luster as well.
As successive British governments fluctuated between liberalism and various degrees of state control of the economy, the pound also fluctuated between a free-floating regime and different forms of fixed structures. It was floated for the first time in 1971, which led to long period of turmoil (as part of the general chaos of the 70s). The continuous high volatility of the currency eventually forced the Thatcher government to maintain a “shadow” peg to the German Mark, until the peg was destroyed by speculative attacks in 1992.
Since 1997, the monetary policies of the UK are managed by the newly independent Bank of England, which pursues an inflation-targeting plan in the setting of interest rates.
The EURGBP pair is a world to itself most of the time. Its correlation with other pairs such as the EURCHF, GBPUSD, EURUSD, or EURJPY pairs is often limited. Since both Britain and the European Union are major, independent economic actors on the global scale with strong domestic sectors and less dependency on external factors (in comparison to, for instance, Switzerland, or Japan) trends in the EURGBP are somewhat independent of factors unrelated to the two economies. That is not to say that they will not be impacted by global risk perception, or by liquidity/volatility levels prevailing in the rest of the forex market, but we do mean that the EURGBP pair makes a good choice for diversifying most portfolios.
The most important statistical and news releases influencing this pair are the interest rate decisions of central banks, and the current account balances of each economy. Global risk perception plays a role in determining the underlying trend (in favor of the GBP when markets are calmer, and of the Euro in more difficult conditions) but this is not a solid principle in this case. The pound is also highly sensitive to the fortunes of the financial sector due to the status of Britain as a major center of speculation.
Carry trade strategies are applicable to this pair to a lesser extent than the more popular ones such as the AUSDJPY, the AUDUSD, or the EURJPY. Scalping strategies can be applied as well, and often with greater flexibility, since the EURGBP pair is often liquid enough to justify short-term, high-frequency trades. This pair has little relationship to the commodity market, but in general, bullish stock or commodity markets tend to favor a higher pound value, while a bullish bond market can favor the Euro.
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