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The Office of Budget Responsibility has announced today that they have raised the 2010 GDP growth forecast to 1.8%, from the previous 1.2%. Likewise they have also dropped the 2011 forecast from 2.3% to 2.1%, this is due to the austerity measures being put in place and a return to normal credit conditions. We saw this coming for a few days now and it was also unsurprising that the new chair of the OBR Robert Chote has put his confidence in the deficit reduction plan which must have pleased the coalition.  The OBR also commented that the spending review, which came out in October, allowed the public sector job losses to be cut from 490,000 to 330,000. So although unemployment will rise again, there is less fear of a double dip recession.

UK Mortgage approvals came out this morning, and illuminated yet more dismal news for the housing market as the number fell to its lowest point in eight months in October. The 47,185 figure was down from September’s 47,369 but was similar to the expected figure so it wasn’t a big surprise.  These figures are half the average rate of mortgage approvals and as we have been saying recently, it looks likely to drop even further in the run up to Christmas. Net Mortgage lending rose to 963m from 174m in September which is good news, but not enough to alter house prices for the better. This data has little affect on the market, with the sterling euro volatility coming from Ireland’s recent rescue package announcement this morning which initially brought relative market calm – this faded pretty quickly as the investor risk reared its ugly head once more over the debt contagion issues.

The UK did not come off very well in the recent WikiLeaks scandal, according to the Guardian who was among the first to have access to the US diplomatic cables. In one of the cables King is said to accuse Cameron and Osborne of ‘a lack of depth’, Prince Andrew also got a mention after some apparently rude behaviour while abroad. They also contain ‘devastating criticism’ of British military operations in Afghanistan.  This information will put strain behind the UK relationship with the US, there is definitely a nervous fear as to what will be released over the next few days.  The Foreign office have condemned the release of the documents and affirmed that the ‘strong relationship’ with the US government will continue.

What with heavy snow and tube strikes, the UK are veering towards familiar winter chaos. The data releases are at least guaranteed, with Consumer Confidence tomorrow, Nationwide housing prices on Wednesday and PMI Construction and Services towards the end of the week.

Jeremy’s Trade of the Week

This week’s trade of the week is a Tiered Risk Reversal with the client wanting to protect the 6 month period of January to June 2011. He buys dollars and sells sterling.

The client was able to achieve a worst case rate of 1.5400 on his option which allows the client to benefit all the way up to a rate of 1.6250, a rate which increases by 0.0050 every month i.e. in January the client benefits up to 1.6250, 1.6300 in February and this continues to 1.6500 in June. Should the rate on expiry be below 1.5400, the client achieves an ‘in the money’ rate of 1.5400. If on expiry in January the rate is above the benefit level of 1.6250, the client achieves 1.6250. Should the rate on expiry be between 1.5400 and 16250 the client achieves the spot rate.

This strategy requires a premium of 1.75%, and is also relevant for buyers of euros and sellers of other currencies. As there is a potential further strengthening for sterling in the future, it provides a balanced upside for this potential, while guaranteeing a WCR only 2 cents from forward rate.

Have a great week