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This week is being held hostage by the Bank of England’s inflation report on Wednesday morning, partly because the decision to keep interest rates unchanged could have been a close call and we will find out just how close when the report comes out. Of course there is a limit to the shock factor of these figures as the MPC would have has a glimpse at them and still decided not to raise rates. What is generally assumed is that the combinations we mentioned in last week’s sterling update, namely; VAT, oil and food price rises, will push CPI inflation up to near the 4.2% mark from where it currently rests at 3.7%. It seems likely that the MPC will use the inflation figure to keep the door open to the possibility of raised rates within the next few months, even if they do not decide to do so.  It would make sense that the MPC would want to be certain of the Q4 slowdown being a blot on an otherwise positive copy book. The threat of a rate rise is not going to go away quickly, the committee will do what they can to avoid putting them up but if the pressure intensifies too much come the middle of this year they might not have a choice.

It doesn’t stop there when it comes to important data releases, after the interest rate announcement comes the ILO unemployment rate and on Friday morning we will see the retail sales figure. We expect to see employment fall again in December what with snow deterring job-seekers, while January’s retail sales could have boosted when consumers were finally able to access the shops, especially with the VAT hike on the 4^th.

David Cameron has stepped up his ‘Big Society’ with the hope of lift-off occurring this year, a ‘vision’ document has been released by Francis Maude, cabinet office minister, and it details the coalition’s strategy. The main disclosure in this document is that it will need approval from the European commission to access millions of pounds sealed in dormant bank accounts. Cameron is aware that the idea of his ‘Big Society’ is not capturing the hearts and minds of the UK, even his own party members seem unimpressed. 

Jeremy’s Trade of the Week

This week’s trade of the week is a ‘Risk Reversal’. A risk reversal allows you to hedge yourself close to the market but in turn for a reduced upfront cost, it gives you 100% benefit up to a pre-determined level.

The client will benefit in all upward movement up to a capped level. Should the GBPEUR rate be below 1.1650 they are able to buy euros at 1.1650, if it is above 1.22 on the first expiry however then they have to purchase euros at 1.22. The capped level  increases by 1 cent every month i.e. month two’s is 1.23, month three’s is 1.24 etc. If the rate is in-between the two levels then the clients purchases the euros at spot.

This strategy has an upfront cost of 1.2% and allows a hedge with a nominal WCR of only 2.2 cents from current market price . It is also relevant for buyers of sterling and sellers of other currencies.