There are several factors affecting the value of the Euro (EUR), especially in comparison to the British Pound (GBP). As economies recover from the COVID-19 crisis and tensions still remain in the aftermath of Brexit, there is much to consider for investors participating in forex trading online.

Eurozone inflation

Whilst recovering from the coronavirus pandemic, and therefore proving to be a bounce-back for the region’s economies, the inflation rate for the Eurozone rose to the highest levels it has seen in a decade. This exceeded the expectations of analysts, with an average rise of 3% across Europe.

Another catalyst for this increase in inflation is the rise in energy prices, which saw an incline of 15.4% recently across the EU, as well as an increase in prices of goods such as food, alcohol, and tobacco. With these levels being the highest since 2012, economists expect the inflation rate to fall again in the future, as these factors subside and change.

The rise in prices and inflation does, however, still put pressure on the European Central Bank (EBC), and the level of monetary stimulus. Investors are likely to monitor these events in the coming weeks and months, as macroeconomic data like interest and inflation rates, will have an impact on the relevant nations’ economies. In particular, the rise in inflation rates across Eurozone could imply a rise in interest rates also, and therefore a strengthened currency.

The EBC forecasts are to be published shortly, at the time of writing, which may outline the trajectory of inflation, as well as the amount of stimulus spending and the flexibility surrounding these factors. As other major central banks, such as the US Federal Reserve and the Bank of England, are expected to reduce their asset purchases, the EBC is expected to continue with its traditional purchase program.

The rise of the Euro vs the Pound and US Dollar

Experts forecast that there will be a continuous decline of the GBP as the year continues and a trajectory that could also be seen into 2022. The anticipation is that it will fall below 1.14 against the Euro by the end of the year, on the basis of the health of the UK economy, with the potential rate of around 1.08 by mid-2022. The forex market could therefore witness a substantial shift in the sentiment towards the Sterling, which could mean that the Euro is more favorable.

The main reason for the expectations of a decline in the Pound is the likely result of economic uncertainty in the UK, which comes with the mixture of previous COVID-10 restrictions being lifted, and the end of household income support schemes from the government.

However, the decline in US dollars (USD) has also seen investors shift towards the EUR/GBP pair. This comes as a result of the US Nonfarm Payroll reports, and the release of data that showed a low number of additional jobs — with 235,000 jobs rather than the 750,000 jobs predicted. The employment rate is also another significant element that can affect the strength of the relevant currency.

EU and UK turbulent relationship

Political factors are also worth considering when it comes to the movement in the forex market, as they can have a significant impact on a country’s currency. The most notable event that shook the market, and the Euro and Pound pair, is Brexit.

The recent fluctuations in the price of this currency pair are likely due to speculated continuing political tensions between the two entities. The UK and EU still need to negotiate a resolution in terms of protocols surrounding Northern Ireland since Brexit, and the grace period for this agreement to take effect is due to expire at the end of September.

This adds more uncertainty to the likely strength of the GBP and highlights further the EUR as an attractive investment for traders.