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The euro (EUR) and the British pound sterling (GBP) are the second and fourth most frequently traded currencies in the world, respectively, behind the US dollar (1st) and the Japanese yen (3rd). The euro was adopted as the official currency of 11 EU member states in 1999 and entered into circulation in January 2002. The single currency zone has since expanded to include 19 countries, with Lithuania the newest entry in January 2015.
Expanding economic and monetary integration in the EU has been a major factor driving regional economic growth and a strong euro in the fifteen years since its creation. However, this expansion also opens up the currency to a larger number of potentially destabilising factors, as evidenced during the recent Greek sovereign debt crisis.
While the euro to pound exchange rate (EUR to GBP) has fluctuated significantly since the turn of the century, the pound has always been the stronger of the two. Between its creation and mid-2002, the euro traded within a relatively tight band from £0.585 to £0.645, according to statistics from the European Central Bank (ECB). The euro was only used for electronic transactions until hard currency entered into circulation in January 2002, and an economic slump in Germany contributed to keep the new currency’s value low.
The euro quickly gained ground against the pound from mid-2002 onward, reaching an initial peak of £0.718 by May 2003. For the next four years, the euro’s value fluctuated between £0.65 and £0.70. The Bank of England raised interest rates in late 2006-2007 in an effort to curb inflation, which led the pound to appreciate slightly against the euro and other major currencies, including the USD.
However, the GBP was one of currencies that was hardest hit by the global economic downturn in 2008. As the effects of the crisis spread to the British financial sector, the euro rose to a then-historic high of £0.80 to the euro and largely held there from March-October 2008. As the crisis deepened in the UK, the euro shot up to an all-time peak of £0.978 by end-December 2008, the closest the two currencies have ever come to parity.
Its gains against the pound began to erode in the next three years, as economic recession and then stagnation impacted the eurozone. In 2011, the exchange rate traded between £0.85 and £0.90. The euro briefly spiked against the pound the following year, gaining over 11% in value between July 2012 and February 2013 to reach £0.873. The ECB had intervened to ease fears about rising European debt levels, which helped to stabilise the euro and attract higher capital inflows to the EU. The UK’s economic recovery had also stalled in 2012 and early 2013, making it a less convincing “safe haven” for capital that otherwise would have gone to the eurozone.
The euro has consistently weakened against the pound since mid-2013, as economic recovery improved in the UK and growth stagnated in the eurozone. The euro’s decline accelerated sharply after November 2014, amid concerns that the new Greek government would default on its sovereign debt and that a European Central Bank (ECB) quantitative easing programme would worsen eurozone deflation. Meanwhile, the UK economy made solid gains. Strong wage growth and lower unemployment in the fourth quarter of 2014 helped to bolster the GBP going into the new year. By February 20th, the euro had fallen to £0.734, its lowest point in the seven years since January 2008, near the onset of the global economic downturn.
In the UK, inflation in the year through January 2015 sank to 0.3%, the lowest on record, according to an Economist report. Low inflation threatens to erode the currency’s gains in the future, but for now, the pound looks set to continue its rise against the euro. Goldman Sachs issued a forecast in late 2014 predicting that the euro will weaken against the GBP between 2015-2017 and could even return to lows not seen since 2002. The bank revised down its medium-term forecast in the November report, predicting that the euro would reach £0.65 to the pound by 2017, much lower than its previous forecast of £0.85 to the pound.
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