httpvh://www.youtube.com/watch?v=Skd0h7HSPQs

A general improvement in sentiment coupled with an increase in Halifax house prices and problems elsewhere have led to a significant increase in the value of GBP yesterday. The pound rallied close to the 1.22 level against the euro whilst breaking back into 1.55s against the USD. This came as a surprise to most traders with many believing the uptick was a typical stop hunting exercise. That ended up to be a painful belief. The pound has fallen off this morning however.

I am surprised that we saw such a move off one housing market indicator which leads me to believe that this spike is temporary and not a trend change although caveats to this exist. One good piece of data from the housing market does not constitute a recovery so other factors such as mortgage approvals and surveys from other major lenders (Nationwide for example) must be taken into account. It is more than likely that this house price data was a statistical aberration.

The Bank of England decision is the key piece of policy today with the MPC unlikely to change either the base rate of 0.5% or the QE level of £200bn. Some commentators are looking for a loosening of monetary policy via an expansion of quantitative easing in the near future given the slowdown in the UK recovery although we believe this to be unlikely given the UK’s consistently sticky inflation.

There were further wobbles in Europe yesterday as a Portuguese state auction came under focus. While the bid-to cover ratio, demand simply, was high, the yield rose to an eye-watering 5.92%. This is up from the 4.2% previous figure and shows that while investors are willing to back these peripheral countries it shows that they are needing more and more money to do so. Overnight the wobble has transformed into lower stock markets with investors needing persuasion to push risky assets higher. Sentiment was also poor after the Fed’s Beige Book which showed that a widespread slowdown in the US is taking place.

Apart from the Bank of England announcement at noon and the typical Initial jobless claims figures at 13.30, the only major piece of data is UK trade balance at 09.30