httpvh://www.youtube.com/watch?v=REK28kV4CTk

The Bank of England interest rate announcement last Thursday brought very few surprises. Interest rates were kept on hold for a 26th consecutive month, there were no further stimulus packages to speak of and market participants let out a collective yawn.

The current condition of the UK economy will have undoubtedly divided the opinion of committee members. Should we hike rates in an effort to curb inflation rates of 4%? – Levels which are double the BoE’s target. Or, should we keep rates on hold? – Giving the economy every chance to build on the 0.5% GDP growth rise we saw in Q1.

PMI figures spanning the manufacturing, services and construction sectors released on Tuesday, Wednesday and Thursday respectively made a case for the hold, keeping the doves well fed and the hawks in the dark. All three releases came in above 50, indicating that there was growth in all three sectors. However, the rate of the growth is down from April’s releases meaning talk of a rate hike would prove premature.

Today the CBI warned the UK economic recovery will be patchy and slow for the remainder of 2011. Their growth forecasts for 2011 are down from 1.8% to 1.7% and they commented that “the recovery continues to be choppy and lacking in vigour”. In an environment of high inflation, fuelled by rising oil prices and mass public spending cuts it is no surprise to hear that we still have a long way to go.

The CBI predicted that export led growth could prove one of the bright spots of our economic recovery so long as global demand keeps some momentum. However, talk of interest rate hikes should be put on ice for the summer months as any move on this seems unlikely until August at the earliest.

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 1.1100 to 1.1200. 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 1.20 on expiry, 8 cents better than the strike rate, the client receives 1.16, 4.00 cents better than the strike rate. Should the GBPEUR rate be below 1.12 and above 1.07 on expiry they are able to buy euros at 1.12, if it is below 1.0700 however, then for every percentage point below 1.0700 they lose the same off their strike of 1.1200.

This strategy is premium free and allows a hedge with a nominal WCR of only 1.75 cents from current market price while a normal participating forward would see a WCR at least 1 further cent lower. It is also relevant for buyers of sterling and sellers of other currencies.