Libra to Euro: Key factors shaping the GBP/EUR exchange rate

The GBP/EUR cross is one of the most dynamic currency pairs in the forex market, particularly relevant for European and British traders. It represents the relationship between the UK currency and the eurozone, where each point of the exchange rate reflects the amount of euros needed to buy one British pound.

Current Outlook for GBP/EUR

In early February 2023, the pair’s closing price was at 1.120 €, showing a depreciation of -1.45% in the last month and -2.03% over three months. Over the past 52 weeks, the cross has ranged between 1.0786 and 1.2190 €, demonstrating moderate but significant volatility for currency strategists.

Historically, the range is much wider: the all-time high was recorded in May 2000 at 1.752 €, while the low occurred in December 2008 at 1.02 €. These extremes highlight how major geopolitical events and financial crises transform the behavior of this currency.

The Impact of Brexit on the GBP to Euro Trajectory

Before the 2016 referendum, the GBP to EUR was consistently above 1.30 €. Since then, the scenario has changed radically. The British currency has mostly remained between 1.06 and 1.21 euros, compressed within a much narrower range.

The most notable drop occurred on the same day as the Brexit result, when the British pound suffered its worst performance in three decades. Subsequently, during 2017 and 2019, sustained depreciations were recorded, bringing the exchange rate to comparative lows against the euro. This reflects how uncertainty in trade negotiations between the UK and the EU generated ongoing selling pressures on the British currency.

As financial institutions unwound positions in pounds, anticipating trade frictions and political volatility, the currency’s relative value compressed. In 2022, the movement was particularly abrupt: the pound started the year at highs but by mid-year fell toward the lower ends of the established five-year range.

Macroeconomic Forces Behind the Exchange Rate

The behavior of EUR/GBP is not random. Indicators such as GDP growth, inflation, interest rates, and employment directly drive demand for each currency. Institutions like the Bank of England and the European Central Bank (ECB) play decisive roles through their monetary policy decisions.

Currently, both institutions have adopted similar tightening stances: the Bank of England has raised interest rates and signals continuity in this strategy, while the ECB has followed a parallel path. However, any future divergence—such as the UK accelerating hikes while Europe slows—could reshape the relative attractiveness of both currencies.

Economic projections showed divergent expectations for 2023: while the OECD anticipated zero growth for the UK, the eurozone showed slightly more favorable trajectories. This growth differential influences how investors value both currencies in the medium term.

Volatility and Liquidity: Operational Characteristics

The GBP/EUR pair is highly liquid, allowing for competitive spreads and quick execution. In contrast, its inverse EUR/GBP has lower liquidity. This asymmetry causes spreads to widen during periods of high market volatility, affecting trading conditions.

Liquidity concentrated in GBP/EUR reflects that both economies are major global financial and commercial centers, generating constant trade and speculative flows.

Operational Recommendations for Trading GBP to EUR

Synchronization with Trading Sessions

The pair exhibits maximum volatility during the European forex session, specifically between 08:00 and 17:00 London time. This period accounts for approximately 35% of daily forex volume, offering opportunities for reduced spreads and more significant price movements.

Monitoring Economic Calendar

Both the UK and the eurozone release macroeconomic data that quickly redefine the exchange rate. Inflation, employment, and interest rate reports require priority attention. Additionally, statements from the Bank of England and ECB can trigger abrupt movements.

Sensitivity Analysis to Geopolitical News

Since 2016, events related to UK-EU negotiations have consistently impacted the cross. Although Brexit is now a fait accompli, its trade consequences continue to influence market sentiment and how traders assess the risk of the pound.

Future Outlook for GBP/EUR

According to analyses from institutions like the OECD, a recession was projected in the UK for multiple quarters, with a likely sluggish recovery in 2024. Inflation was expected to reach peaks near 11% during that period. These stagflation scenarios create complex interest rate cycles that shape the yield differential between the two currencies.

Although the pound showed relative strength in early December 2022, it experienced declines toward mid-January 2023, reaching 1.124 € against the euro. This movement reflects how changes in risk assessment quickly reshape international investors’ positions.

The GBP/EUR cross will continue to be a key thermometer of expectations regarding growth differentials and relative stability between economies. For traders, maintaining vigilance over the economic calendar, monetary policy changes, and geopolitical developments is essential to capitalize on the opportunities this dynamic currency pair presents.