httpvh://www.youtube.com/watch?v=7xjvj4aF11k

The coalition received a boost in confidence last week after the services sector in the UK rebounded to 54.5 in January. This was the highest the survey has been since May last year and was released at the same time as an equally strong manufacturing sector survey was released. Prices charged by companies for services also rose at the fastest rate since September 2008 thanks to the VAT rise and a rise in their own costs. This data added fuel to the fire under speculations that the MPC may raise interest rates sooner than anticipated. It would be easy to get over-excited by the survey’s discoveries, but there was always going to be an increase in services data after December’s bad weather. In general, it does highlight the possibility that the double-dip recession fears are unfounded and that we could see amendments to both the fourth-quarter and first-quarter growth rate.

This brings us on to the BoE rate decision this Thursday, and you have to feel a bit sorry for the MPC. Even though inflation has leapt over its target this is down to a collection of factors, which individually would not have had such a negative effect. The rise of VAT, thrown in with oil and food price hikes and sterling’s suicidal drop after the crunch in 2007, all are to blame for the inflationary pressures. The question is whether a change in monetary policy will have any impact at all on these or future strains. Last time we saw Martin Weale and Andrew Sentance vote to raise interest rates, which leaves the majority of the committee waiting for stronger evidence of inflation before they join their colleagues.

New immigration rules have come to light as the Home Office prepares to propose changes to the investor visas. What this will essentially mean is that wealthy investors will only have to spend half a year in the country as oppose to nine months and the wait for a permanent visa will be cut dramatically. This is creating anger as it comes at the same time as a cut on the number of skilled workers British businesses can import and the number of foreign students which can migrate to study in Britain.

The bonus saga continues as RBS is about to pay out a round which could see over 200 staff earn more than 1 million. Cameron blamed the previous Labour government as apparently they agreed a contact with the bank that their bonuses this year could be ‘in line with the market’.  This is not the last we will see from the pay argument, especially after news that Bob Diamond, chief executive of Barclays, is to receive 9.5 million.

Jeremy’s Trade of the Week

This week’s trade of the week is a ‘Participating Forward Plus’. This differs from the usual participating forward in that, for an increased risk, your strike improves from 1.1650 to 1.1700. The client decided to hedge his next 6 months of exposure via this trade.

The client will benefit in 50% of any upward movement i.e. should GBPEUR be 1.24 on expiry, 7 cents better than the strike rate, the client receives 1.2050, 3.50 cents better than the strike rate. Should the GBPEUR rate be below 1.1700 and above 1.1150 on expiry they are able to buy euros at 1.1700, if it is below 1.1150 however, then for every percentage point below 1.1150 they lose the same off their strike of 1.1700

This strategy is premium free and allows a hedge with a nominal WCR of only 2.5 cents from current market price while a normal participating forward would see a WCR at least 0.5 further cents lower. It is also relevant for buyers of sterling and sellers of other currencies.