What drives the euro to pound pair?

The EUR/GBP rate is influenced primarily by central bank policies, economic data, political stability, and external market trends. Understanding these factors can help traders anticipate potential movements in the pair.

Interest rate differentials

Monetary policy decisions by the Bank of England (BoE) and the European Central Bank (ECB) can significantly affect EUR/GBP movements. If the ECB signals a more hawkish stance or tightens policy relative to the BoE, capital flows may favour euro-denominated assets, potentially strengthening the euro against the pound. 

Conversely, if UK rates are higher, sterling may find support as investors seek greater returns. Traders closely monitor GDP growth, CPI inflation, employment data, purchasing managers’ indices (PMIs), and wage growth, as these indicators influence central bank actions and market expectations.

Economic fundamentals

Economic indicators such as GDP growth rates, inflation figures (CPI), and trade balances directly affect EUR/GBP. Stronger-than-expected eurozone data can enhance the appeal of the euro, while resilient UK data may support the pound. 

For instance, if eurozone growth or inflation outpaces expectations, markets may anticipate tighter ECB policy, underpinning the euro and pushing EUR/GBP higher. Similarly, positive surprises in UK data could lend support to sterling, resulting in a lower EUR/GBP rate.

Geopolitical conditions

Government policies and political stability indirectly influence EUR/GBP. Pro-business policies, trade agreements, and stable governance typically increase currency confidence. Political uncertainty or abrupt policy shifts, however, can trigger volatility. The UK has signed trade agreements with several major economies in recent years, though a comprehensive deal with the US has not yet been concluded. 

Ongoing discussions and agreements with the eurozone and India have contributed to market sentiment, but traders remain vigilant to political developments.

External market trends

Stock market performance and global risk sentiment also influence EUR/GBP exchange rates. In periods of market optimism, investors may favour higher-yielding or riskier assets, which could benefit the pound if UK assets are attractive. 

In contrast, during bouts of risk aversion, flows may move into perceived safe havens such as the US dollar or Swiss franc, though the euro can also benefit given the size and relative stability of the eurozone. Commodity market swings may have an indirect effect on the pair, particularly where they impact risk sentiment or sectors tied to the UK or eurozone economies.

Learn more in our forex CFD trading guide.