Neighbours, Trade Partners, and Rivals: A History of the Pound-Euro Currency Pair
Reading time: 10 minutes
This article is going to take a look at the currency conversion history of the Euro against the Pound. It will explore the reasons why the currencies are so popular, the financial crisis of 2007-2009, EUR/GBP exchange rate history, and more. The EUR/GBP currency pair is an important Forex (FX) cross by virtue of the popularity and importance of the two currencies involved.
Why Are These Currencies So Popular?
The first reason is the size of the economies. The UK economy is the fifth largest economy in the world. The combined economy of the countries within the Eurozone constitutes over a fifth of global GDP, according to IMF estimates made in 2016. Another important reason is the wide usage of the two currencies. Every three years, the Bank for International Settlements conducts a survey of the foreign exchange market. It is a useful source for certain aspects of Forex historical data.
According to the 2016 installment of the Triennial Central Bank Survey, GBP was involved in one side of 12.8% of all FX trades, and the Euro was involved in one side of 31.3% of all trades. While this latter ratio has declined since the Eurozone crisis, the Euro remains second only to the Dollar in terms of dominance as a vehicle currency. Not only are GBP and EUR important currencies globally, but their two economies also have unusually close ties.
Eurostat data shows that the UK is the Eurozone's largest import trade partner, while in turn, the UK sends around 40% of its exports to the Eurozone. These ties mean that their bilateral international trade and foreign exchange rates are closely interrelated. The UK opting to leave the European Union (EU) and the accompanying implications for UK trade have proven damaging to the value of the Pound.
Monetary Union and the Birth of the Euro
The FX rate history for European currencies has been turbulent at times, including the 1990s, when the Exchange Rate Mechanism (ERM) was in place. The ERM was a sort of first attempt at stabilising exchange rates. Though it failed by itself, it did test the waters for greater monetary integration within the EU. The stated goal of European finance ministers in pursuing European monetary union was greater stability.
When we look at the Euros to Pounds history, however, it is debatable as to whether this has been achieved. The currency was birthed amidst a burst of optimism at the start of 1999. At the Deutsche Börse in Frankfurt on 4 January 1999, the Euro symbol was projected on the wall, while Beethoven's triumphant 'Ode to Joy' blared from the PA system. The UK remained a part of the EU but opted out of the Euro, of course.
This meant that the original Pound-Euro exchange rate was fixed at midnight on 1 January 1999. This was when the European Central Bank (ECB) introduced the Euro and the shape of historical currency exchange underwent a major facelift. While the countries within the Eurozone moved to a homogenous monetary policy under the auspices of the ECB, the Pound remained under the control of the Bank of England (BoE). The difference in monetary policy frameworks between these two central banks has played its part in shaping EUR to GBP history.
So what are these differences? The goal of the Bank of England is to deliver price stability, via low inflation, and to support its government's objectives for growth and employment. In contrast, the ECB is solely focussed on price stability. The impact of this difference became pronounced over the course of the financial crisis.
Central Banks and the Financial Crisis
In accordance with the goals above, the BoE was more active in cutting rates earlier in the financial crisis than the ECB. Now central bank action is, of course, one of the major factors affecting exchange rates. We can see from the weekly EURGBP chart featured below that the impact this disparity in timing had on the Euro to Pound exchange rate history:
Source: MetaTrader 4 - EUR/GBP Weekly Chart - Data Range: 21 January, 2007 - 10 May, 2009
It is important to stress that the changes above were not the only changes made by the ECB during this period. The ECB also made changes to its deposit facility, and its rate for the marginal lending facility. The REFI rate is the the interest rate for the ECB's main refinancing operations, which provides the majority of liquidity to the Eurozone banking system.
It is, therefore, the major benchmark rate for the ECB. As we can see from the chart: the EUR/GBP historical data shows a progressive strengthening in the Euro versus the Pound over the period in question. In July 2007, the EUR/GBP exchange rate was around 0.6750. By July 2008, the Bank of England had cut its bank rate by a total of 75 basis points, while the ECB had actually raised its benchmark REFI rate by 25 basis points.
The points labelled on the EUR/GBP chart above correspond to the summary table below:
ECB Main REFI Rate
ECB Cumulative Change
BoE Bank Rate
BoE Cumulative Change
By this time, the Euro to GBP rate had increased to around 0.8000. By March 2009, the BoE had slashed its benchmark rate all the way down to 1.00% for a combined total of 475 basis points since July 2007. In comparison, the ECB had cut its REFI rate to 1.5%, a cumulative reduction of 250 basis points since July 2007. The historical exchange rate had strengthened up to 0.9000 by then.
This illustrates how central bank actions are one of the key factors affecting currency rates. On a related note, we can also see the correlation between interest rates and the strength of a currency. The fast decline in UK rates relative to the Eurozone REFI rate meant that the Euro became more attractive relative to the Pound. In fact, it was during this period that we came the closest to the parity that we have seen in GBP vs EUR history: on 28 December 2008, one Euro was worth 0.9801 Pounds.
The upward move in the EUR/GBP currency pair over this period was steady and persistent. In contrast, we shall see in the next section how breaking news can rapidly swing prices. Whichever market condition you are trading in, it's important to use a high-quality trading platform. For instance, MetaTrader 4 is a great platform for trading FX. MetaTrader 5 is also available for professional traders, and with Admiral Markets, traders can download the Supreme Edition plugin to use an extension for both platforms.
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Brexit: EUR/GBP Exchange Rate History in the Making
Source: MetaTrader 4 - EUR/GBP Daily Chart - Data Range: 6 June, 2016 - 21 November, 2016
The Euro to Pound chart above shows two sharp declines for the Pound: the two most significant EUR/GBP Forex news stories of 2016. The first one, in June 2016, transpired with the outcome of the UK's referendum on whether to leave the EU. The surprise vote to leave hammered the Pound against not just the Euro, but against pretty much all other commonly-traded currencies.
If you check the currency rate by date, on 24 June 2016 you will see GBP plunge to some degree against whichever currency you care to choose. The EUR/GBP spike you can see on that date was the effect of the market scrambling to price in the negative implications for the UK economy. It is as dramatic a move as any we've seen in the Euro to Pound history. Retracements are a common enough pattern in historical foreign exchange rates: in periods of rapid re-evaluation, you often see the market overreact, and some kind of retracement follows in the aftermath.
What's interesting here though, is the subsequent upward path in the Euro to GBP exchange rate history. The question has been asked of whether the UK government has the right to leave without its parliament's say, and answered in the negative by the UK High Court. Yet the EUR/GBP rate remains elevated from where it was after the announcement of the Brexit vote.
You can interpret this more than one way. One interpretation is that the market is pricing these obstacles in the way of Brexit into the level of EUR/GBP to some degree. This line of thinking would suggest that should these obstacles clear, the EURGBP forecast may still be gloomy for the Pound. It will be interesting to see how the question marks over the UK's plan for Brexit resolve, and whether the Pound to Euro exchange rate history can test those all-time highs seen back in late 2008.
An opposite line of thinking would suggest that the lack of clarity over Brexit's future is itself a drag on the Pound. This interpretation would see upside potential for the Pound once details begin to firm up. Whether you are bullish or bearish about the Pound's prospects, the best way to first test out your judgement is with our Demo Trading Account. It allows you to trade with real FX prices, but in a risk-free trading environment: the perfect place to practice.
The Flash Crash
The sterling flash crash occurred in October 2016, and further illustrated the market's anxiety over Brexit, and its implications for the Pound. The EUR/GBP rate spiked briefly all the way up to 0.9227 that day, before closing at 0.8999. The exact causes behind this precipitous loss in the value of the Pound are not yet fully understood, but it seems likely that automated trading in a thin-volume time period played a significant part.
Ultimately, the move was extremely short-lived. It is telling a sign of market sentiment that Sterling once again continued to weaken in the days following the event. If you are interested in reading a bit more on the flash crash, why not take a look at our article on the history of GBP/USD or USD/EUR.
Euros to GBP History: What Does the Future Hold?
Among the factors that affect exchange rates, sentiment can be one of the more powerful in the short term. There is an old market adage that the market hates uncertainty, and that historical FX rates tend to bear this out. For the UK and the Pound, much uncertainty still surrounds Brexit. Who knows when the clouds hanging over the Pound will clear, but it will likely be a fascinating journey.
This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.