After a tumultuous end to last week for the Sterling/Euro pair, yesterday we saw rates remain within a 1 cent range between 1.3550 and 1.3650. This still represents a large cost difference when buying a large amount of currency, however relative to the huge drop we saw last week, it actually seems quite stable! Regular readers of my blog and those keeping an eye on the currency markets in general will know that the coming few days will be incredibly important for exchange rates.
In addition to the usual economic data releases that may cause rates to change we have, of course, the UK parliamentary election on Thursday. It is a significant event to determine the appropriate stance of monetary policy and assesses the risks to long term goals of price stability and sustainable economic growth in the UK, and as such, it’s highly likely to affect the Pound.
In the last week alone, a purchase of €250,000.00 has differed in cost by more than £6,500.00. Similar cost differences over the next week will not be a surprise. Therefore if you need to convert one currency to another this week, you should have a clear plan in place with regards to what you want to achieve, and how you’re going to achieve it.
Simply sitting back and hoping the exchange rate will move in your direction is not a wise approach, and in today’s report we will have a look at how you can protect yourself against market volatility the election may cause, and look at ways you can protect yourself.
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UK General Election likely to cause significant market volatility
Let’s put things in context. Elections always cause uncertainty, and as I’ve mentioned several times in our analysis over the last few weeks, this election result is highly unpredictable.
At the moment it looks likely a hung parliament will be the result, so not only will the market face volatility this week, the biggest price movements may actually be in the following few weeks while deals are made and the main parties attempt to form a coalition government.
Financial markets look for stability in order to spur investment and confidence, and the currency markets are no different. Without intending to sound political, and looking at this from a purely analytical point of view, one example would be the prospect of a Labour/SNP deal. In my view the financial markets would not react favourably to that given the effect it may have on business investment and the economy as a whole and so could send the Pound lower. At the moment there is no way to know what government we will have a few weeks from now, so let’s take a sensible look at ways you can protect yourself against market volatility to ensure your currency does not cost more than necessary.
How to protect yourself against exchange rates moving the wrong way
The below is a brief outline of the main contract types I can offer. For a full outline of the options you can consider, the first step should be a free consultation, so that you can make an informed decision on what to do.
Some options you can consider are outline below. They’re not too complicated and these smart ways to trade offer a host of clever advantages depending on your individual situation. For a more detailed look at the options you can consider and to get a quote for your exchange, contact me today.
Spot contract - The quickest, easiest and most popular way to buy and sell currency – you simply exchange one currency for another, whenever you need it. You have two days to send us the funds and, as soon as your funds clear, we’ll forward the currency to the account of your choice.
Forward contract - A forward contract can help protect against market volatility, useful for managing your budget. You can set the price now for a transaction that will take place up to two years in the future, allowing you to fix the exact value of the currency to be paid, regardless of market fluctuations. You secure the forward contract with a margin of 10% of the total value of your transaction (you’ll need to pay this within two working days of agreeing the contract) and then pay the balance before the contract expires. Once secured, the agreed exchange rate will apply for the duration of the contract. This is very popular at the moment.
Limit order - With a limit order you specify the exchange rate you are hoping to achieve – which may not currently be available. Your currency will automatically be purchased if the market exceeds this rate, meaning you get the price you want. This type of contract is particularly useful when the markets are moving in a positive direction for you.
Stop loss order - A stop loss order instructs your broker to buy if the exchange rate goes down to a pre-determined level. When combined with a limit order, you can hold out for a better rate while protecting yourself from a sudden fall in the market.
To have your free consultation and have a detailed chat specific to your currency requirements and timescales, contact us today.
Please note I will be overseas for the next 10 days, so will be back in action on Friday the 15th May, with a full analysis on happened to exchange rates after the election