The pound was dealt a reality check last week, after retail sales figures disappointed and policy makers warned of further pain to come. Thursday’s figures revealed a slump in consumer spending for the last month causing an immediate selloff of the pound, which finished the week marginally up against the dollar and euro.

Equities were driven down by 2% over the week, with the FTSE weighed down by banking and mining stocks. A dovish result for the Bank of England minute’s midweek also took some shine off the pound, as did later forecasts from the World Bank which predicted the global economy is going to shrink by 2.9% this year, a worse figure than earlier forecast.  This saw commodities fall amid speculation that there would be lower worldwide demand for raw materials. Risky currencies followed commodity prices south as their fortunes display high correlation, the Australian dollar performing particularly poorly over the week.

Inflation figures from the Euro Zone, US and UK all painted different pictures, with UK inflation surprising on the upside, US CPI on the downside, and the Euro zone arriving at roughly consensus. UK inflation remains sticky, in part due to the weak pound helping drive exports. This will continue to worry policy makers going forward, because if inflation persists at higher levels, unwinding of the stimulus that the UK central bank has injected may occur at an earlier than optimum time. Reaction to the figures in the currency markets was generally muted, as investors overall seem relieved that consumer prices are still in positive territory.

Not only was the data muddying the waters, opinions from experts were also divergent, regarding what direction the economy would next be headed. Well respected hedge fund manager George Soros commented that the worst of the financial crisis is behind us, while Nouriel Roubini, the outspoken economics academic who famously predicted the crisis, contradicted this, saying that the “crisis is not over”

The euro continued to struggle as the European Central Bank (ECB) warned that its banks will face losses in the region of £175bn. Sterling continued to push towards its highest levels of the year against the single currency as a result and this trend looks set to continue over the short and medium term.     

This week’s major piece of event risk is the US Rate Announcement due on Wednesday evening. The Euro zone provides PMI readings for services and manufacturing tomorrow, and Industrial new orders on Wednesday. Tier one data from the UK is nonexistent this week.

Trade of the Week

This week’s trade of the week is a Participating Forward Extra for a seller of GBP and a buyer of Dollars.

This zero premium option gave the client a worst case rate (WCR) of 1.60 and the ability to participate in 50% of favourable movement upwards of the WCR.

If, on expiry, GBP/USD is below 1.60, and above 1.45, the client can buy at 1.60. If, on expiry, GBP/USD is below 1.45, for every percent that the rate is below 1.45, the WCR (1.60) also falls by a percent. If, on expiry, GBP/USD is above 1.60, the client is able to participate in 50% of the movement upwards. For full details of this structure please contact one of our options traders on 0207 801 9050.

Enjoy the week