The FOMC decision on rates was as non eventful as they come, with the expected announcement that interest rates and the Quantitative Easing program would remain unchanged causing currency, equity and bond markets to remain relatively stable. George Eliot once said that “the finest language is mostly made up of simple unimposing words” and the Fed were clearly on the same wavelength, printing a largely unchanged statement from their last meeting. Once again they reiterated that “economic conditions are likely to warrant exceptionally low levels of federal funds for an extended period”, a line they have used many times before. The Fed only changed ten words from their last statement in their assessment of the wider economy, absorbed as a slight dollar positive, as they admitted that conditions in the financial markets had improved in the recent weeks.

Midweek’s inflation report from the Bank of England also suggested they were slightly more optimistic about recovery prospects, signalling that inflation would slightly overshoot the 2% target if rates and QE were kept steady.  As a result of these upward revisions we still forecast rates to be hiked in early 2010.

A stronger than expected investor confidence reading supported the euro throughout the week, as did Fridays surprise result from France and Germany. The growth data revealed that their economies had both avoided further contraction, underpinning late week euro strength.  This buoyed EU-wide growth figures which showed that the 16 country union actually underwent a 0.1% contraction, far better than the 0.5% expected by economists. The latest country to join this enviable back-on-track club is Japan, as figures revealed the second largest economy in the world has now climbed out of recession, retracing from the sharp decline it experienced over the last year. The Yen also gained last week, as Chinese industrial data was weaker than expected, triggering a slight push back into the Asian safe haven.

The UK is thrown the microphone this week to reveal a raft of data. Rightmove house prices, Consumer Price Index (CPI) and CBI Industrial trends kick-start the week, while Bank of England minutes, retails sales and public net sector borrowing figures round it off. The Euro zone has construction figures, PMI and ZEW sentiment figures to contend with, while housing starts are the main piece of data due from the States.

Trade idea of the week

This week’s trade idea of the week is a Risk Reversal for a seller of GBP and buyer of EUR.

This Premium Paid Risk Reversal gave the client a worst case rate of 1.14 and a best case rate of 1.24 for an upfront premium of 1.1% – 2.5% depending on the total size of the contract.

If, on expiry, GBP/EUR is below 1.14 the client will receive 1.14, if it is between 1.14 and 1.24 the client will buy at spot, and if it is above 1.24 the client has an obligation to buy at this level.

For full details of this structure please contact one of our options traders on 0207 801 9050.

Have an enjoyable week