httpvh://www.youtube.com/watch?v=HYy1L9DZAho

Mervyn King is due to sit in front of the cameras on Wednesday morning and deliver the banks latest ‘Inflation Report’. While the title suggests a focus on prices and their change it is more of a quarterly health check on the UK economy. As a result it is closely viewed by the markets and UK asset traders use the speech, tone and hints as a roadmap towards the future.

Sterling never does well after the inflation report. Mervyn typically veers towards the pessimistic side of things and his reputation as a party pooper is well known. Over the past 2 years there have been 8 reports, obvious given that they’re quarterly, and sterling has lost ground after every single one. In the week following the announcement it has lost on average 3.1% against the US dollar and 1.85% against the euro. So were we to enter the press conference at the same levels at the time of writing (GBPUSD 1.5950 and GBPEUR 1.2010) you would expect to see falls to around 1.5455 and 1.1787 in GBPUSD and GBPEUR respectively.

The combination of this weight plus the belief that sterling is slightly overbought against the USD on a short term time frame leads us to believe that we will see sterling fall in the month of August; something subscribers to the webinar would have heard Jeremy speak about on Thursday.

King is likely to point out that the future for the UK is uncertain and that the growth in the UK is likely to be affected by the austerity measures due for enactment by the coalition government over the course of the second half of the year. Surveys from business and consumers have shown that confidence and levels of purchasing have been falling off in the past couple of months; creating a gap alongside the upcoming chasm that budgetary cuts will cause.

Let it also be known that, at the moment, that the Conservatives’ plan of cutting as soon as possible looks to be the more beneficial plan of attack as opposed to the laissez-faire, wait a year plan that Brown’s Labour government had been proposing. A convenient example is the US and the problems that their economy is facing at the moment. Obama is being pilloried for letting the economy continue to spin out of control and it looks like the Fed meeting, due tomorrow, will see more restorative quantitative easing needed.

Good work Blue Team (so far at least)

Jeremy’s Trade of the Week

This week’s trade of the week is a brand new structure combining the ability for you to gain significant upside should the rate go in your favour while elevating your worst case rate as well. The structure is called the Leveraged Convertible Step.

The client was able to achieve a worst case rate of 1.56 on their option and they benefit up to a rate of 1.68. Should the GBPUSD rate be below 1.56 on expiry they are able to buy dollars at 1.56, if it is above 1.56 and below 1.68 they buy in the spot market and if it is above 1.68 they are obligated to buy twice the amount of dollars hedged at a level of 1.62.

So even if you are ‘knocked in’ you revert to a level that is currently 3 cents better than a forward that you would be able to buy now.

This strategy is free to the client and is also relevant for sellers of sterling and buyers of other currencies. As there is a potential further weakening for sterling against the US dollar given the run it has had of late, it provides a balanced upside for this potential, while guaranteeing a tight worst case rate.

For full details of this structure please contact one of our options traders on 0207 801 9050

Have a great week