Is the Pound Too Volatile to Trade Before Election?

Is the Pound Too Volatile to Trade Before Election?

Volatility is generally a good thing for Nadex traders, but with the polls showing the British election becoming close, with a chance that the Conservatives may lose their majority, the GBP is fluctuating wildly. 

UK Prime Minister Theresa May |
UK Prime Minister Theresa May | Controller of Her Majesty’s Stationery Office

The British pound hit a five-week low on Wednesday with the release of new polls ahead of next week's parliamentary elections. Prime Minister Theresa May surprised many when she called last month for a snap election rather than waiting until its scheduled time next year. Under the UK's system, parliament can call for an election if a majority of members support it.

At the time (mid-April) calling for an election seemed a wise, though surprising, move. May's Conservative Party had a more than 20-point lead in the polls and a solid victory would give her a mandate to negotiate with firmness with the EU in the upcoming and lengthy Brexit talks. Then the sure thing took a series of blows, including some self-inflicted ones by May.

In particular, May flip-flopped on an issue which has nothing to do with Brexit or anything that could directly impact the pound. Nevertheless, the flip-flop coincided with the beginning of the downturn in both her polling advantage and the value of the GBP. May announced a revision to the policy of her predecessor David Cameron on long-term health care for the elderly. Even outside an election season, that issue is sensitive and ripe for political spin and conflict.

Cameron's proposal was to put a cap on how much elderly people would be charged for their health care. If their costs went over 72,000 pounds, the government would foot the rest of the bill. However, 72,000 pounds means something different to a retired plumber than it does to a wealthy baroness.

May proposed that as long as people's assets exceeded 100,000 pounds (including their house), they would continue to be charged for their health care expenses. The specifics may not be an ideal or even effective solution, but politically, the idea of charging wealth people more than you charge the working class would seem to be a winner. Instead, the press started calling it a "dementia tax" and her populist, somewhat fiscally responsible idea got turned into a tax hike on elderly sick people.

To make matters worse, May didn't even try to defend or explain it. She just reversed her position. That left her defenders looking foolish and mean and it didn't win over any of her critics. The story then became one about her lack of strength and stability. Given that this election was called specifically to confirm that she was the strong, stable leader Britain needed to go toe-to-toe with the Europeans, it was an especially severe blow.

The blow landed on both her poll numbers and the nation's currency. A YouGov Plc survey released Wednesday actually predicts that the Tories may fail to win a majority of seats in the new parliament by as many as 16. When it hit the news, the pound plunged to its 5-week low. Later, another poll (taken over a week ago) gave them a 15-point lead. That and another 10-point poll caused traders to reverse the day's losses by the close.

Traders flip-flopped on Theresa May almost as quickly as Theresa May did on health care. 

When conflicting and changing news seems to be driving a market's ups and downs, what's the right strategy? Do you watch for the latest tweets and alerts and then take your best guesstimate of what the market is likely to do? Do you look for news reports on what investors or money managers are saying, maybe featuring a quote from some head of research or strategy at some fund or advisory firm? Or do you avoid looking at the news altogether?

The answer may lie somewhere between the extremes. You can be aware of the news without speculating on it. That way, if a new poll suddenly predicts that the Tories will lose, you can be on guard for a drop in sterling prices. At the same time, you can stay focused on what actually is happening, rather than what might happen. If the pound has been in an uptrend for most of an hour, it may well continue until it reaches a resistance level. In that case, you can go long.

The key of course, is to protect yourself against sudden reversals. In other words, if Theresa May suddenly announces she's leaving politics to become a race car driver, you won't lose an unexpected and unaffordable amount. The old way to protect yourself, with a stop-loss or option hedge, can work just fine if you do it skillfully.

Or you could just trade the British pound on Nadex, where that protection is built in and happens automatically. That way, if you stop watching the news for a lunch break and come back to find that Theresa May and Jeremy Corbyn have both quit to form an improv comedy duo just as Scotland has seceded and the Spice Girls have confessed to lip-syncing all their hit songs, you're covered. Every Nadex contract comes with its own little insurance policy against crazy fluctuations like the current pre-election jitters.

If only Brexit came with that kind of guaranteed limited risk.

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