HOW LOW WILL IT GO?

The pound looked dangerously close to parity with the euro last week as fears mounted that the UK would be hardest hit by the world recession..

Mike Chadney , a fixed-odds bookmaker, said the election of Barack Obama was providing support for the dollar, but added: “The pound’s already fallen a long way and could snap back.”

Andy Yates at financial data firm Digitallook.com, said: “The past six months have been littered with gloomy economic data, but the currency markets are notoriously unpredictable and at the moment they’re even more volatile than normal.”

Jeremy Cook at World First, a currency broker, expects the pound to strengthen to $1.66 in six months and $1.73 by this time next year. Against the euro, he foresees a lesser rally, to €1.23 next summer and €1.28 in 12 months.

Those who call the direction of currency markets right can make tidy profits. Here are some of the options:

SPREAD-BETTING

One of the easiest ways to profit from exchange-rate movements is to sell sterling and buy strengthening currencies. Forex trading has opened this up to retail investors.

Spread-betting allows investors to “short” the market and speculate that a currency will continue to fall — or rise — against another currency. Gains are made from betting on the right direction.

Digital Look said 72.5% of all short positions taken by private investors last week were bets against sterling — that makes it by far the most popular area of the market.

“Private investors normally favour company shares for short-selling, but this has shifted to sterling,” said Yates. “Private investors have had a very tough time over the past year so it is interesting that they have been making some decent profits from the slide in the pound.”

Spread-betting firms quote a spread on a given currency. For example, Capital Spreads last week gave a spread on the pound against the euro of €1.1232-€1.1235. You could “buy” at the upper end — if you think the pound will strengthen — or “sell” at the lower end if you think it will weaken.

Say you bought at ¤1.1235, on a £1 a point movement bet, and the pound strengthened until the spread being quoted was €1.1315-€1.1318. You could then close your position by selling at €1.1315. This would give you an £80 profit (€1.1315 minus €1.1235 equals 80 points, multiplied by your £1 a point stake). However, if the market went in the other direction, you would lose in equal proportion.

BINARY BETTING

Binary betting allows you to take a view on whether or not an event will happen — that the pound will slide on a given day, or the FTSE 100 index will close down.

There are only two outcomes in a binary bet — the event either happens or it doesn’t. In this regard, it is similar to betting on horses or a football match.

With a binary bet, your potential loss is fixed at the amount you wager, and potential profit is also fixed, based on the odds that are given when you place your bet.

This contrasts with spread betting: here, profits and losses are open-ended, although you can place a “stop-loss” on your trade — the level at which it will close to limit losses.

City Odds has seen a 50% jump in users of its trading platform in the past three months. Around a third of trades are on the pound versus the dollar.

You can also bet on the euro against the dollar, and the company, launched a year ago, plans to introduce pound versus euro trades in the new year.

Betters set their own parameters within which they think a certain market — a currency market, stock market or commodity, like gold or oil — will close on a given day. Typically, odds are about three to one.

The tighter the range, the better the odds, and the higher your potential return.The average bet is about £10, but can range from £5 to £100.

Last Thursday you could get odds of eight to one that the pound would close at between $1.4970 and $1.5180. On a £100 bet, you would have won £817.18 if it closed at this level.

It ended at $1.4950 when the London market closed at 5pm. This is the point at which City Odds’ bets close, although currency markets are generally open round the clock.

If it looks as though the bet is going against you — or if you want to take profits — you can “sell” your bet back to City Odds during the day.

If the currency value moves farther away from your range, the price that City Odds will give you for your bet drops to, say, £25 on a £100 bet. If, however, it looks like you might win, but it’s not a certainty, you could sell a £100 bet for £150. This means you’ll still turn a profit — though not as much as if you had you waited until the end of the trading day and you were within the range you set.

BUYING CURRENCY

You can also directly trade one currency against another, buying those currencies that you think will strengthen and selling ones you expect to weaken.

Betsy Waters at , Deutsche Bank’s online retail currency-trading platform, said: “Retail foreign exchange has come of age in the financial crisis. Forex as an asset class has been proved to be uncorrelated to equity and bond markets so it’s not surprising that more investors are looking to currency as a means of generating returns.”

The platform has seen an 118% increase in trading volumes in the year to the end of November compared with the same period last year.

GO TO THE BOOKIES

Bookmaker William Hill last week opened a book on when the government will announce that the pound is to be abolished and replaced by the euro. It is offering odds of 20-1 that it will happen next year.

“There seems to be an inevitability about the euro replacing the pound eventually, but the big question is when a government will have the nerve to do it,” said spokesman Graham Sharpe.

Odds are at 14-1 for 2010, 10-1 for 2011 and 2-7 for 2014 or later.

Cut the pain

The weakness of the pound will hit expats earning in pounds and European holidaymakers alike. For pensioners and others on fixed sterling incomes, the effects will be even more pronounced. Fortunately, there are ways to reduce the pain.

Pensioner living on the Continent

Older Britons living in Europe but drawing their pension in pounds could well be wishing they had fixed the exchange rate in January last year, having seen their euro income slashed by close to a third in the past two years.

Fixing at €1.12 to £1 is much less tempting, but it will provide certainty and could prove a good move if euro sterling parity becomes a reality.

If you believe the sterling to euro rate will continue to fall, you can pay a deposit of about 10% to fix the rate you receive through forex firms such as Moneycorp for up to two years.

If you are an expat

Expats hit by the falling pound can take the same steps to shelter from currency fluctuations, but this will depend on whether they expect the euro to keep gaining ground.

Forex specialists and currency traders are currently putting the rate at the end of next year between €1 and €1.3, according to research from adviser Hargreaves Lansdown. But nobody really knows what is going to happen, so optimists may prefer to wait and see.

If you are buying a property

Anyone with a large future commitment in euros would probably be sensible to fix the exchange rate for that transaction now to prevent any problems raising extra funds should the rate worsen.

If you are a second homeowner

Anecdotal evidence suggests that a number of Brits with second homes in Europe are cashing in on the weak pound by selling up — and changing the proceeds of the sale back to pounds at a record rate.

However, many European countries are undergoing housing market busts, so any currency gains could be wiped out.

If you are concerned about meeting mortgage repayments, it may also be worth setting an advance monthly exchange rate. You could hedge your bets by fixing a rate for this amount only, and take your chances with spending money.

If you are a holidaymaker

Britons planning a European skiing holiday could similarly buy half their euros at today’s rates to limit the pain should sterling fall even further.