What affects euro exchange rates?

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What do I need to know about the euro if I’m transferring pounds to Europe?

The euro is the second most-traded currency in the world and the currency of the world’s largest single market. If you’re purchasing property in Europe, you’ll most likely be buying euros to do so. As such, it’s important that you understand how the euro works: what the European Central Bank is, what affects the euro exchange rate and how you can control it.

Find out how currency fluctuations could affect the cost of your property by downloading a free copy of the Property Buyer’s Guide to Currency.

Who uses the euro?

The euro was first introduced as electronic currency on 1 January 1999 and began to be used as cash on 1 January 2002.

It was initially adopted by Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, the Netherlands, Portugal and Spain. Now, that’s expanded to 19 EU member states, including Greece and Cyprus. Together, they make up what’s known as the Eurozone.

The euro is also used in four European microstates: Andorra, San Marino, Monaco and Vatican City. Additionally, Kosovo and Montenegro have adopted it without an agreement by the EU, so they use the currency but don’t issue their own coins and notes.

Who’s responsible for the euro?

The European Central Bank (ECB) is in charge of implementing monetary policy, aiming to keep prices stable. It sets the interest rates, authorises the issuing of euro banknotes and buys or sells currency to balance exchange rates – more on this later.

What are the criteria for joining the Eurozone?

There are five specific economic conditions countries have to meet to adopt the euro, known as the ‘convergence criteria’. These criteria are:

  1. Price stability: the country’s consumer price index has to be no more than 1.5% above those of the three best-performing member states.
  2. Sound public finances: government deficit can’t exceed 3% of the country’s GDP.
  3. Sustainable public finances: government debt can’t be more than 60% of the country’s GDP.
  4. Durability of convergence: the long-term interest rate can’t be more than 2% above the three best-performing member states.
  5. Exchange rate stability: the currency has spent two years in the European Exchange Rate Mechanism.

All EU member states apart from the UK and Denmark are obliged to join the euro once they meet these criteria. The European Commission and the European Central Bank assess candidate countries every two years.

What affects the euro exchange rate?

If you’re transferring euros, such as GBP-EUR, you’ll have noticed that the exchange rate is constantly changing. This is down a broad range of factors, but there are some particularly key ones to keep an eye on:

  • Interest rates: if the ECB raises interest rates, generally the value of the euro will increase – and vice versa. Equally, if the Bank of England raises rates, then the pound should appreciate.
  • Inflation: if inflation is high, generally the currency will depreciate (lose value) so that prices of goods remain more or less stable.
  • Economic growth: if growth is strong, the euro will generally increase in value – and likewise fall if growth is worse than expected. Economic data from the largest Eurozone economies, like Germany and France, is closely monitored by investors.
  • PMI: the Purchasing Managers’ Index shows purchasing managers’ confidence; if they’re buying up stock in shops and factories, the euro will normally increase in value.
  • Brexit: uncertainty and lack of direction in Brexit makes for extra volatility: negative predictions or low confidence can cause the pound to drop significantly against the euro.
  • Speculation: if investors think the euro is going to rise in value, they’ll buy more now so that they can make a profit – and this increase in demand will cause the value of the euro to rise.
  • Balance of payments: If the eurozone’s imports are more valuable than its own exports, and it can’t attract enough money to finance this, then the euro would fall in value. This is because demand for euro falls as it has to be sold in larger quantities to buy imports.

With so many factors impacting it, the EUR-GBP exchange rate can be very volatile. You can see how much the euro has fluctuated using our simple tool here:

Can anyone tell where euro exchange rates will go?

In July 2015, the euro hit a historic low against sterling of 0.69 as prospects of high UK interest rates pushed the pound up against the euro. On the other hand, in December 2008, the euro hit a historic high against the pound, at 0.96, after soaring borrowing in the UK – a thirty-cent difference.

If you’re transferring pounds to euros, it’s absolutely crucial to be aware of how quickly the exchange rate can shift. However, although constant movement is predicable, where it will go is entirely unpredictable.

As you can see above, there is a whole range of factors that impacts the sterling-euro exchange rate – and absolutely nobody knows where it’ll be tomorrow, let alone next week, next month, next year or in five years.

What does this mean if I’m sending money overseas?

Anyone buying euros – whether it’s for a house payment, for pensions, to pay off a mortgage or more – needs to carefully plan ahead. You are dealing with an inherent risk, but the good news is that you can control it with prior thought.

At Smart Currency Exchange, our personal traders can help protect your budget with a forward contract. This is where we can lock in a particular exchange rate for up to a year – so you don’t expose your money to the constantly changing markets.

Imagine that you bought your dream holiday home in France for €200,000. On 5th August 2018, that would have cost £178,000. On the 8th August 2018, it would have cost £180,000. That’s a £2,000 difference to make up in just three days. At Smart Currency, we could have saved this hypothetical buyer from a big loss through locking in the original rate in a forward contract.

Stay updated with the latest news on the euro

Our experts write daily updates on what is happening to the euro, and provide commentary on all of the latest news and developments affecting the euro. Our insights are regularly featured in the national press, on Forbes, in the Guardian and in many, many more places but you can get access to this information completely free by subscribing to our mailing list.

Call our traders today on 020 7898 0541 and they would be happy to answer any questions you may have and give you an update on what is happening with the euro today.

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