Spread Betting: Trading EUR/GBP
Spread betting on the euro vs. pound sterling in the Forex market means that you are on familiar territory, and may be confident that you have some ideas about how the currencies will move. As with all trading, it is wise not to be too confident, but let the market tell you by its actions which way the prices will run. In fact, the EUR/GBP is considered by some traders to be one of the more difficult currency pairs to make a consistent profit at.
There are a number of fundamental factors that you can figure into your spread betting. Some of these are fairly obvious, but perhaps it might be worth listing them. In particular the direction of the EUR/GBP cross is largely dependent on the changing economic outlooks between the economy of the eurozone relative to the economy of the United Kingdom. As such reactions to eurozone and UK date is likely to have a minimal effect on the EUR/USD and GBP/USD currency crosses but may well blow up on the EUR/GBP pair.
The pound sterling may be at its highest point against the Euro for 7 years (January 2015), but this cannot be taken as a vote of confidence in Sterling; it simple reflects the lack of trust in the market for the Euro. In fact, the pound is still hovering at its lowest levels against the USD since 2010 and has dropped from a peak of 1.71 in 2014 to its present level of 1.51, making our exports cheaper but travel to the USA and outside the Eurozone much more expensive.
The balance of trade, the summary of imports and exports to the country or region has a major effect, because imports must be paid for and exports result in funds flowing in. In the case of the euro, as Germany is a major participant in this currency, it is worth looking at the German trade balance as well as the balance for the European countries as a whole.
Another standard factor to review is the rate of inflation, and more generally the consumer price index for both the euro zone and for the United Kingdom. By seeing how much people are spending, there is further information about currency flows. Couple this with information on industrial output, such as the Gross Domestic Product, or GDP, and you can form a fairly good idea of the state of any economy.
Finally, a major influence in fundamental factors is the government or bank guide interest rate. For Europe, this is the ECB rate, and for the UK the Bank of England is charged with setting an interest rate to control the economy. If one of the two currency zones offers a better interest rate, then there is a natural tendency for investors to buy into that currency, so they tend to keep in line.
However, when you are spread betting or trading on the Forex, you should be more concerned with daily or weekly fluctuations. The fundamental factors mentioned above are more likely to impact the currency exchange rate over a longer term. The exception to this is when the statistics are announced, as quite often there is a marked kick in the chart following an unexpected figure. Unless you are experienced, the best advice may be to stay away from the markets when an announcement is due. Even experienced traders can be caught out by the rate going in the opposite direction to that which would be expected. Frankly, we should not expect otherwise, otherwise the Forex market could be regarded as a sure fire money machine, and by definition that outcome is impossible – not everyone can win.
If you apply the techniques of technical analysis, plotting indicators to see whether the currency is oversold or overbought, and particularly taking account of support and resistance levels, then you should be able to anticipate the market moves in the majority of cases.
For instance, if you believed that the euro is likely to slip lower against the pound sterling in the forseeable future, you could go short on the EUR/GBP and in such a scenario you would make a profit if the euro were to fall in value in relation to the British pound. If, however, you believed the euro to strenghten, you would open a long position on EUR/GBP and you would gain from any strenghtening in the value of the euro against the British pound over and above your buy price.
Naturally, with financial spread betting, you would stand to gain as long as the prices move in the direction you had predicted. (i.e. the euro rallies and you had gone long EUR/GbP or the euro falls in value and you had gone short EUR/GBP). If, however, you were on the wrong side of the trade and prices moved in the opposite direction, you would incur a loss.
Take a Spread Betting Position on the Future Direction of the Euro
Spread Betting on the EUR/GBP. Because the currencies are so well known, many people are interested in spread betting on the EUR/GBP. The current spot price, for a daily rolling bet, is 8299.4 – 8304.3. The only thing to note about trading a currency pair is that you want a long or buy bet if you think the first named currency is strong, and a short or sell bet if you favour the second currency, as it is equivalent to saying that the first currency is weak.
Suppose you think that the euro will increase in value against the pound, you would then want to place a long bet for say £9.50 per point, and wait see what happens. When choosing how much you stake, you need to bear in mind the amount of volatility that you should expect. In this case, with the EUR/GBP, you might well see nearly 100 points in a day.
Assume that the euro does strengthen and the quote rises to 8482.6 – 8487.5. If you close the bet now, you can work out your winnings like this: –
- Your bet was opened at 8304.3
- Your bet closed at 8482.6
- You gained the difference in points, which is 178.3
- You staked £9.50 per point, so you won £1693.85
If your bet had been wrong, and the quote had gone down, you might have to close your bet quickly so that you did not lose too much. Say it went down to 8243.6 – 8248.5, and you decided to accept your losses. You can work out how much that was in a similar way: –
- Your bet was opened at 8304.3
- Your bet closed at 8243.6
- You lost the difference in points, which is 60.7
- For your stake, you lost £576.65
As you took out a long bet on a daily rolling basis, which means it is rolled over each night to the following day, you will also have been charged a small amount of interest each evening. An alternative is to take out a longer-term bet, or futures style bet as it is called. The quote for one that expires in six months time is 8313.9 – 8325.7. The bigger spread between the selling and buying prices impacts your direct profit, but you do not have regular interest payments taken from your account while you hold the bet.
So you might want a long bet for £5 per point on the British pound. Remembering that this is the same as a short bet on the first named currency, the euro, you place this as a short bet on the currency pair. If you are right, and the quote drops to say 8096.2 – 8108.0, you could close your bet for a profit. Your bet closes on the buying price of 8108.0. As a short bet is taken out on the selling or lower price, the number of points you gained is 8313.9-8108, or 205.9 points. Multiplying this times £5, you have won £1029.50.
Once again you might have been wrong and decided to close your bet if the quote went up to 8356.2 – 8368.0. 8368.0-8313.9 is 54.1 points, which costs you £270.50.
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