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The MPC are facing some pressure at their upcoming meeting on Thursday to extend liquidity support. We have mentioned before in this update that recent meetings have already shown a split within the MPC what with Andrew Sentance threatened by rising inflation and Adam Posen using sluggish trade as a reason to inject extra stimulus, while King works his usual magic. While the rest have adopted a ‘wait and see’ attitude towards the economy, which will prove the most likely outcome on Thursday and indeed probably the interest rate will remain unchanged for a while. This decision is based on the recent events in the eurozone and the fact that austerity measures have not fully started to take effect.

The Liberal Democrats are expected to split three ways after Clegg admitted that he could not hold his party together ahead of the vote on tuition fees this Thursday. Clegg and Cable are expected to vote for the policy while up to a dozen may oppose it and I imagine several will abstain. The atmosphere is very uncomfortable as mass protests are expected to be carried out across the country. It does look certain that the coalition will win the vote on Thursday to lift the fees cap, which could cause tuition fees to rise to a maximum of £9000 a year but a final decision on voting tactics will be made tomorrow.

Sterling took a bit of a back seat last week as the attention was directed towards the contagious eurozone, for which we should be thankful after escaping relatively unharmed from the Ireland debacle. We had some good news and some bad news; PMI Construction rose to 51.8 even though the forecast was for a withdrawal to 51.3. According to the reports optimism over future business prospects improved to the strongest in five months which helped the figure rise instead of be damaged by the low employment rate. On the other hand House Prices have kept slipping and according to Nationwide’s report they are up on last year but down from last month.

Still the WikiLeaks saga continues to embarrass international relations, and the US and UK have unsurprisingly condemned the decision by the website to publish, most recently, a list of strategic facilities. The latest cables reveal a plethora of worldwide installations such as underwater cables, factories and pipelines; it has been referred to as a terrorists dream.

Have a lovely week!

Jeremy’s Trade of the Week

This week’s trade of the week is a Premium Free Participating Forward with the client wanting to protect the 4 month period of January to April 2011. He buys dollars and sells sterling.

The client was able to achieve a worst case rate of 1.5300 on his option which allows benefit of 50% upside should spot on expiry be higher than 1.5300 i.e. in April 2011 should spot on expiry be 1.6500, 12 cents better than the WCR, the client achieves 1.5900, 6 cents better than the WCR. 

This strategy requires incurs no cost, 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 3.5 cents from the forward rate.