Any Forex Opportunities in U.K. General Election?
U.K. General Election 2010 was held on Thursday, May 6. The outcome of the election has surprised many pound and U.K. stock market bulls by resulting in hung parliament (the first one since February 1974 in U.K.). According to the latest results the seats among the three major parties were divided this way: Conservatives have won 306 seats, Labour Party — 258 seats and Liberal Democrats — 57. One seat will be contested on May 27 due to the unexpected death of one of the candidates.
Like all major political events, general election in U.K. tend to influence the financial markets in general and the pound’s behavior on Forex in particular. The aim of this analysis is to find out whether there were any interesting Forex trading opportunities presented by this election and what were they. GBP/USD was selected as an example due to its higher liquidity and volatility compared to EUR/GBP. There were four major events during the day of the election (May 6) and the day after election (May 7), which have impacted greatly the GBP/USD currency pair:
1. First exit poll results announced at about 22:00 (London time) on May 6. They suggest a hung parliament.
2. The traders became concerned that the Tories ain’t going to win the majority in the election. BBC‘s Jeremy Vine lets out his first formal prediction of the election result, which was quite close to the actual result. Between 5:00 and 5:36, May 7.
3. BBC officially confirms the hung parliament situation at 9:41, May 7.
4. Traders’ optimism surges as Nick Clegg of the Liberal Democrats agrees to let David Cameron of the Conservatives become the next Prime Minister at about 10:30 on May 7.
So, what was the actual impact of these events on the GBP/USD dynamics? The image below describes an M15 chart of the currency pair with the colored vertical lines delimiting the trend jumps caused by the said events:
1. The sector limited with the red lines represents the impact of the first exit polls’ results. During 30 minutes the currency pair went down from 1.4830 to 1.4741 or 89 pips. That’s from Open to Close, if measured from the maximum to minimum it would be 177 pips, but it’s impossible to position trades in such a way.
2. The blue lines serve to limit the sector of the effect caused by first confirming results that, signaling that Conservatives alone won’t be able to form a government. The pound declined severely from 1.4820 to 1.4628, or 192 pips in 1 hour.
3. The sector limited by the green lines is a fall caused by the official confirmation of the hung parliament from BBC. It resulted in another drop, this time by 196 pips in 1 hour.
4. The magenta lines are delimiting the growth, which followed by the information that Nick Clegg is going to support David Cameron as the next Prime Minister of the United Kingdom. GBP/USD rose by 203 pips during 2 hours.
As we can see, all four opportunities could yield a lot of pips to the Forex traders that would use them. This method of trading has its advantages:
* A total gain could have been 680pips during less than 24 hours, while the daily average true range during last 14 days before the election was only 168 pips.
* Although they are short-term opportunities, they have a strong fundamental background and the Forex traders could get prepared for this trading session beforehand.
* Entry points are quite obvious — you just enter when you see the news. And with internet it’s quite easy to be in the market during the first 1–2 minutes after the news is released.
But, of course, there are also some disadvantages:
* While entry points are clear, exiting such positions is quite a problem It’s good when you have another news that suggests going into an opposite direction (like was the case with the 3rd mentioned event), but in other cases you’ll have to develop your own exit strategy.
* Elevated volatility during some of the news releases could have made it impossible to enter any position at all. But it looks like it wasn’t the case this time.
* Deciding which news is important and which isn’t, inside such a strong flow of information can be a real problem.
I hope that this analysis can be useful not only to those who intend to trade during the next U.K. general election (in 2015) but also during any other such important election.