The pound and the euro – a complex relationship

The pound and the euro are two of the world’s most important and commonly traded currencies.

While sterling is the oldest currency still in use today, the euro is a relatively new arrival, having been introduced on January 1st 1999.

Geographical and commercial ties between the UK and Europe mean the two currencies are closely linked and highly influential upon one another.

They have had an interesting relationship during the recent years of economic hardship for many countries, with the pound suffering drastic falls in value and the euro encountering some problems of its own.

Pound sterling

With a history stretching back to the year 760, when it was introduced as the silver penny, the pound is the oldest currency still in use today.

It is also one of the most commonly converted and highest valued of the world’s major currencies, according to XE.com.

Sterling is the fourth most traded currency on the foreign exchange market, after the US dollar, the euro and the Japanese yen.

When the British Empire was at its strongest, use of the pound spread to a number of countries around the world, creating a network known as the Sterling Area.

However, the decline of the empire and the British economy made way for the growth of the US dollar, to which sterling was pegged at a rate of £1 to $4.03 in 1940.

More significant developments came in the early 1970s, with the termination of the Sterling Area and the introduction of decimalisation, which created the modern system of 100 pence to a pound.

The pound experienced a number of ups and downs during the decades following decimalisation, but remains the currency of the UK despite the country’s membership of the European Union.

The euro

The euro is a single European currency shared by 17 EU member states, including four of the union’s five largest economies – Germany, France, Italy and Spain.

It was launched in 1999 and is regarded as one of the EU’s biggest successes, with some 330 million citizens now using it and enjoying its benefits.

The euro was initially launched as a currency for cashless payments and accounting purposes, before being made available in the physical form of notes and coins from the start of 2002.

According to the European Commission, the introduction of a single European currency made “economic and political sense”, and also made travelling easier within the EU.

The authority points out that using a common currency contributes to low inflation, encourages “sound public finances” and facilitates international trade.

Despite all these positive effects of the euro, the eurozone is currently going through a crisis that started in late 2009, linked to issues including public debt, problems in banking systems and slow economic growth.

Links between the two currencies

There have been a number of significant themes in the relationship between the pound and the euro, one of the most striking of which was the drastic fall in the value of sterling over the course of two years from the start of 2007.

According to data from XE.com, the pound reached a peak value of €1.52 in January 2007, but after struggling with all sorts of economic adversity fell to just €1.03 in December 2008.

It experienced something of a resurgence last year, with the exchange rate reaching £1 to €1.28 in July 2012. The rate now stands at about £1 to €1.19.

Looking forward, there are several factors that could influence the sterling-euro exchange rate in the near future, such as the burgeoning economic recovery in Britain.

Data from the Office for National Statistics suggests that UK gross domestic product increased by 0.4 per cent between the final quarter of last year and the first quarter of 2013, and again by 0.7 per cent between the first and second quarters of this year.

Another factor that affects currency exchange values is interest rates, with higher rates often attracting foreign capital to an economy and causing the exchange rate to increase.

The Bank of England has said the UK interest rate is unlikely to rise from its current level of 0.5 per cent until unemployment – which is currently 7.7 per cent – falls below seven per cent.

If you are involved in a foreign property sale or any other process that requires an overseas money transfer using pounds and euros, take a look here to find out more about some of the currency services available.