Among the elements that most draw the attention of investors to certain currencies compared to others and therefore influence the movements, either up or down, of currency pairs, we find of course the interest rates fixed by the large central banks.
Here we will explain how this influence can be used in order to generate profits more rapidly together with pertinent analyses of major coming trends on the EUR/GBP currency pair.
The particularities of the EUR/GBP
The EUR/GBP currency pair is the eighth most traded currency pair on the Forex and it is quoted with four decimal places according to its supply and demand.
Another particularity of this currency pair is that it can be quoted either way. You can therefore sometime see this currency pair quoted as GBP/EUR by some brokers.
As the EUR/GBP currency pair is known for having a relatively low volatility, it is renowned for being a trending pair. This signifies that this pair can frequently be observed as experiencing very long rising or falling trends with little intermediate fluctuation. It is therefore recommended to trade this pair using traditional trading methods and avoid using CFDs or day trading as they are less profitable due to this pair’s low volatility.
Historically, the EUR/GBP currency pair has always moved in a fluctuation channel of between 0.5673 and 0.9800.
Although the majority of people know of the central bank related to the Euro, the ECB, it should be noted that that of the Pound Sterling is the Bank of England, otherwise known as the BoE. It is therefore important to follow all news and all communications relative to these two financial institutions to follow the current trends and those to com for the EUR/GBP.
Which organisations fix the EUR/GBP interest rate?
The large central banks are therefore the entities responsible for the fixing of the currencies interest rates. For the Euro it is of course the Central European Bank that determines and modifies the rate. For the British Pound, the interest rate is decided by the Bank of England, the central bank for Great Britain.
These rates and their movements are published weekly in the economic calendar.
Why the rates influence the price of the EUR/GBP:
The interest rates of the currencies are undoubtedly the most influential elements on the Forex market as they alone determine which currency can be most attractive without taking into account the exterior elements or the movements of the currency pair rate of which they form a part. In fact, the higher the interest rate of a currency, the more profit it can make at its resale against another currency.
It is therefore essential to compare the interest rates of the Euro and Pound Sterling at the time when you take position and also the time when you close it.
The importance of the support and resistance levels in the analysis of the EUR/GBP currency pair
As the EUR/GBP currency pair has a low volatility, the traders that speculate on this value place great importance on the support and resistance levels observed on the charts in real time.
The technical analysis holds a fundamental place in the deduction of forthcoming trends and you need to be ready to act at any time according to the different psychological thresholds.
Of course, the ideal is to couple this information from the fundamental analysis with that originating from the technical analysis to have an overall significant view of the market.
How to analyse in the Euro (EUR):
Let us now study each of these two currencies in more detail by examining how to analyse and trade them effectively. The Euro is of course the official currency of the Euro zone which forms part of the European Union. It is also the second currency in terms of trading throughout the world after the American dollar with nearly 33.4% of all currency trades. We can explain this popularity with traders by the importance of the Euro for international trade.
The value of the Euro is actually directly correlated to the worldwide economic cycles. Therefore, when there is growth worldwide the risk aversion is weak which is beneficial for the Euro currency and, to the contrary, when the global economy suffers a crisis then the risk aversion is significant and the Euro tends to lose its value. We can therefore state that the Euro is a risky value and not a safe haven.
In the past several events and crises have strongly influenced the rate of the Euro such as the subprime crisis in 2009 that led to a positive correlation between the Euro and the sterling pound until 2013, and again in 2015 for a few months.
During the subprime crisis the Euro rate remained relatively normal despite a strong risk aversion in the markets due to a fall during this same period of the value of the American dollar. However, it is generally the internal crises of the Euro zone that negatively influence the rate of this currency.
This was notably the case in 2010 with the Greek crisis. Greece was then just about in default and threatened the stability of the Euro zone. The anxiety relating to the possible exit of this country from the Eurozone created doubts with the investors as to the durability of the Euro monetary union model. We therefore witnessed a logical but major fall in the value of the Euro on the Forex market but finally Greece was saved from default due to an emergency rescue plan that enabled the Euro rate to stabilise.
During this period the Euro fell on the financial markets. Finally Greece was saved due to an assistance plan and the EUR currency stabilised.
However Greece is not the only country that threatened the stability of the Euro in the years following 2010. Other countries such as Italy and Portugal also created anxiety in the markets. We therefore saw the creation of the European Financial Stability Facility or EFSF with the intention of assisting countries experiencing extreme difficulties. However in 2015, when it was believed that Greece had been stabilised, the radical left came into power causing a renewal of anxiety throughout Europe as it challenged the agreement passed between Greece and the European Union leading to new negotiations. This renewed anxiety caused a new fall in the value of the Euro. We can also analyse the variations in the Euro value according to the European economy in general. Between 2008 and 2009 the financial crisis of the Euro zone reached its peak and the GDP fell but the currency remained relatively stable. It was only from the end of 2009 that the Euro suffered the consequences of this crisis that in fact was reaching its end whereas growth recovered until 2011. From 2011 to 2013 we note a new diminution of the European economy but this did not significantly impact the Euro rate which remained relatively stable. Finally, from 2013 to 2016 the weak growth of the Euro zone led to a period of strong volatility of this currency which led to a general rising trend of this currency value. We could therefore state that the European economic growth data does not have any significant impact on this currency.
To summarise, to analysing effectively in the Euro and its exchange rate, it is primarily necessary to focus on the Euro zone crises that often lead to a major drop in this currency value. This can be explained by the fact that the Euro is a fairly recently introduced currency which does not reassure traders over the long term. The risk aversion is actually the most influential factor as it concerns the taking of positions on the Euro whereas the growth of the Euro zone in fact has relatively little influence.
The Euro therefore resembles the sterling pound or GBP in that it is a volatile currency that can therefore be considered as a little risky.
How to analyse in the British pound (GBP)
Let us now pass on to the method of analysing in the value of the sterling pound or GBP. The British pound is the official currency of the United Kingdom and the fourth most popular currency traded on the foreign exchange market with nearly 12% of the trading. The importance of the British pound is due to the City holding a predominant role in the global financial sector.
As with the Euro, the British pound is particularly sensitive to risk aversion and therefore depends on worldwide economic cycles. As a result, this currency has the tendency to increase in value when the economy is healthy and to fall in times of crisis.
Depending on the period in question the rate of the British Pound can display a positive or negative correlation with other currencies at risk such as the Euro. For example, between 2010 and 2013 we note a positive correlation with these two currencies whereas in 2008 and 2009 the pound sterling fell although the Euro remained stable. We can therefore state that the GBP is more sensitive to risk aversion than the Euro. Concerning the negative correlation phases between the British pound and the Euro, we can particularly cite the year 2014 and the end of 2015 due to various factors that you should take into consideration.
Among the other factors to take into consideration when trading in the sterling pound is of course the British economy as the growth of this country is highly variable with numerous peaks and a high volatility. In 2009 the GDP of the United Kingdom fell by nearly 5% due to the financial crisis before slowly recovering between 2010 and 2012 and then accelerating its growth during 2013 and displaying record growth in 2014. If we compare these years in charts displaying the British pound we note a massive rise in its value whereas the value of the Euro dropped. We can therefore use the periods of crisis and growth in the British economy as a fundamental indicator.
Since the end of 2015 we do however observe a major fall in the rate of the GBP due of course to the Brexit referendum announcement leading to the possible exit of the United Kingdom from the European Union.
We can therefore analyse the British pound by basically using the risk perception level of investors relating to the financial markets as this currency appears to be particularly sensitive to risk aversion in general with an increase in its value in the case of a strong risk aversion and a fall in the case of a weak risk aversion. Risk aversion depends mainly on the worldwide economic growth and is therefore generally easy to anticipate. We also recommend the monitoring of the economic situation of the United Kingdom which is sensitive to economic cycles and which of course also has a major impact on this currency. The GBP is considered as a growth asset and is therefore highly influenced by this fundamental data.
To summarise, a growth in the British economy in a time of economic crisis would be the best sign of a drop in the EUR/GBP whereas a crisis that touches the entire European Union and Great Britain would be more favourable to this currency pair with the Euro remaining stable and a fall in the British pound.