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On Monday, bearish data for the UK housing market could have been foreseen. The muddied waters of the UK’s economic outlook were always likely to weigh on individual’s financial circumstances and deal a heavy blow to housing demand. Halifax House Prices decreased from 0.1% in March to -1.4% in April. The RICS housing price balance came in at -21% painting a bleak picture of the UK housing market.

The Bank of England inflation report gave Sterling a shot of adrenalin as it looks increasingly likely we will see a rate hike in 2011. Talk of inflation reaching levels of 5% later this year means the majority of market participants are predicting a rate hike in November. It also looks unlikely that inflation will come back to the 2% target until late 2012 due to increases in VAT and higher energy and import prices.

Mervyn King commented that “inflation remains volatile, with sharp month-to-month movements. The MPC needs to look through such short-term fluctuations, and focus on the outlook in the medium term.”

Sterling’s boost was short lived however. Thursday brought disappointing figures for manufacturing and industrial production. Both sets of data saw a meagre rise that came in less than half what the City had forecast. Inflation rates may eventually force the hand of the BoE but with the manufacturing sector struggling this much it is hard to make a case for a hike.

Key releases for Sterling this week

Inflation data out on Tuesday at 9.30am – we think that CPI will come in above expectation resulting in Sterling strength.

Bank of England minutes on Wednesday at 9.30am – we are not expecting any change in who voted for what but a slightly more hawkish tone to the minutes would be bullish for Sterling. Released at the same time, the unemployment rate is expected to hold firm at last month’s reading of 7.8%.

Retail sales are out on Thursday at 9.30am – we are anticipating the reading coming in above expectations which will be bullish for sterling.

Jeremy’s trade of the week

This week’s trade of the week is a Leveraged Convertible forward with the client wanting to protect a 12 month budget over the coming spring period. He buys sterling and sells dollars

The client was able to achieve a worst case rate of 1.6400 on his option which allows the client to benefit all the way down to a rate of 1.5300. Should the rate touch the barrier level during the window period (1 month before the expiry date) then that month’s structure reverts to a forward at 1.6400 in 1.5 times the amount needed. i.e. if you originally hedged a monthly exposure of $200k then you would need to sell $300k. If the barrier is not touched then he can of course trade in the spot market.

This strategy requires no premium, and the use of leverage allowed the client to increase both his level of protection and the barriers that he can benefit down to.  As there is a potential further strengthening for sterling in the future, it provides protection for this eventuality, while allowing a large amount of potential benefit as well

Have a great week