How to Trade the EUR/GBP (Euro/British Pound)

How to Trade the EUR/GBP (Euro/British Pound)

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Did you know the euro and the British pound are two of the most widely traded currencies globally?

Did you also know that behind the US dollar, the euro (EUR) is on one side of 31% of all trades, and the British pound (GBP) is on one side of 13%?

Trading the euro against the British pound involves taking a position in the EUR/GBP currency pair (Forex pair). While the EUR/GBP is not considered a ‘major’ currency pair, it remains a popular market, referred to as a ‘minor’ or ‘cross’ currency pair. Key points to note about this currency pair are that the euro is the base currency (the first listed currency in the quotation and represents 1 unit) and the British pound is the quote currency (this is the value of the euro in terms of the British pound [the price values you will see on your trading charts, therefore, will be in GBP]). Trading for the pair is also available around the clock, five days a week, with pip values generally priced to the fifth decimal place (0.00010); this can differ depending on the broker (some price out to only four decimal places).

It would be beyond the scope of any article to detail all popular trading strategies used to trade this pair (in fact, it would be impossible). Nevertheless, this post will help provide a basis to work with. Fundamental and technical analysis are two primary ways of trading this currency pair (and any financial market); many traders mix the two techniques to derive broader macroeconomic and technical insights.

Fundamental Trading

Fundamental analysis in the Forex market studies the economic developments of a country and events which can influence the supply and demand of their respective exchange rates, either positively or negatively. This involves a comprehensive assessment of the economy, evaluating central bank policy (monetary policy) and macroeconomic indicators - interest rates, growth (GDP), inflation (CPI and PPI), employment, consumer spending and sentiment surveys, for example. Fundamental analysis, however, is generally directed to three main components: central bank policy, macroeconomic data and the geopolitical picture. Should all three align, the currency market often delivers clear and actionable trends. 

The European Central Bank (ECB) and the Bank of England (BoE) handle monetary and fiscal policies for their respective countries. And this is where fundamental analysis begins: with the central bank and its guidance. Market participants attempt to anticipate the central bank’s actions through guidance and related economic indicators. 

As of writing, both the ECB and BoE have paused policy tightening (rate hikes) in this cycle and inflation and growth remain a key watch for both central banks (and the market). Any increase in inflationary pressures could see the respective central bank increase rates (both rates are currently in restrictive territory as of now), and this could underpin the home currency. For instance, if inflation in the UK increases and the BoE lifts the Bank Rate by, say, 25 basis points (a quarter of a percentage point), this could entice GBP bidding due to the higher yield and send the EUR/GBP lower as buyers favour the pound over the euro and help create a foundation for bearish technical setups. As of this article, most analysts have switched from ‘how high rates will go’ to ‘how long rates will remain at their terminal levels (this is another way to say the final interest rate—its peak rate in this tightening cycle). Therefore, if the BoE begins cutting first (possibly weighing on the GBP), the EUR/GBP currency pair could strengthen, opening the door for bullish technical signals. 

Technical Trading

Trading the EUR/GBP currency pair using technical analysis involves several trading tools. Importantly, which trading style a technician adopts and which trading strategy will depend on several factors, such as lifestyle and experience levels. 

You will find many professional traders/investors who incorporate both technical and fundamental analysis in their research. Fundamental analysis is typically used to identify potential trending markets (helps answer what market to consider), and technical analysis helps answer when a trader can consider engaging with that market (through a chosen strategy). 

Technical trend-following signals, for example, could be as simple as employing moving averages: filters price action and usually only focusses on closing prices (thus ignoring highs and lows). Moving averages can be employed in many different ways, from the direction of the moving average (if pointing higher, this implies a bullish tone) to using a moving average crossover system and offering clear buy and sell signals.  

Another common technical approach is using support and resistance derived through price action. Traders and investors use support and resistance to determine potential floors and ceilings in a market, and breaking one indicates possible follow-through movement (opening things up for possible breakout trading opportunities). Although this method can be subjective, objective ways of locating support and resistance can be found through psychological numbers, previous high and low data and pivot point levels.

Trading the EUR/GBP Pair on MetaTrader

Whether you use MetaTrader 4 (MT4) or MetaTrader 5 (MT5) with FP Markets, the process for entering and exiting a trade is similar (and straightforward). 

Let’s assume that you conduct your technical research on the MetaTrader platform—use MT4 for this example—you could press F9 to bring up the New Order Window on the chart traded (EUR/GBP in this case), as shown in Figure 1. This will allow you to input the necessary data to execute a trade: order type, the volume traded (this refers to the number of lots traded), the entry price (if you enter via a pending order) and the protective stop-loss order level as well as the Take-profit objective. To exit an active position, you would click the x button for that particular trade on the trading terminal (Figure 2).

Figure 1

Figure 2