Political developments causing huge swings in exchange rates

Good Morning. It was a very volatile day on the currency markets yesterday, with exchange rates for Sterling to Euro fluctuating from lows in the €1.14's up to the mid €1.16's. We'll have a look at all yesterdays developments in a moment. First a snapshot of rates @ 08:30am:
What caused the volatility?
First we had the announcement that Emergency measures worth 750bn euros ($975bn; £650bn) have been agreed to prevent the Greek debt crisis from affecting other eurozone countries. You can read more about that here. The news caused markets around the world to surge, as the package gives some sort of stability to the single currency.

We then had the BoE announcement that rates would be left on hold, and that the Quantitative Easing programme would remain unchanged. Again, a detailed BBC report outlines this here.

Political Developments
By far the most important news was the unexpected announcement that Gordon Brown will give up the Labour Leadership. Earlier in the day, it seemed a deal between the Conservatives and the Liberal Democrats was very close. This caused the pound to surge as it suggested political stability, and thus stability for reducing the deficit. Markets liked this, and the pound rose throughout the day.

When Brown announced his decision, it threw these assumptions into disarray, as it suggested that there may still be a deal for the Labour party and Liberal Democrats to form a coalition along with some other smaller parties. As soon as the announcement was made, Sterling fell across the board as this situation will be unlikely to form a stable and secure government needed to provide stability to the markets.

So what will happen with exchange rates today?
We have some production data for the UK today, but by far the biggest driver for exchange rates will be continuing developments in Westminster. The more likely it is that Labour will remain in power, the more the pound is likely to fall. This is because a loose coalition such as being discussed today will not provide the cuts in the deficit the markets are looking for to provide stability to the UK. If a deal is indeed agreed with the conservatives, it's likely that the pound will rise.

Getting the best exchange rate
So, rates could swing by large margins either way today. Volatility can however provide temporary spikes in the market. You can use ‘Currency Options’ to use this volatility to your advantage. The two key tools are a ‘Stop Loss’ order, which will secure your currency if it falls below a pre-agreed level. The other is a ‘Limit’ order, which is placed at the top end of the market to secure currency at a specific price that may not be currently available.

Don't just hope for the best, as even if markets move your way it could well be short lived, as illustrated yesterday with the big swings in rates. Use the options we have available to get the most out of the market, and don't leave it to chance. Control the market, don't let it control you.

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