In Shakespeare’s Hamlet, Polonius utters the immortal words “Though this be madness, yet there is method in’t”.

Last week’s major piece of news saw the Bank of England lower interest rates to a meagre 1.50%, the lowest level it its 315 year history. In a historical context, easing rates this low may appear mad, however they look set to continue falling in order to combat what the bank considered “an unusually sharp and synchronised downturn”, with another 50bp cut forecast for next month’s decision.

The recent meeting’s accompanying statement cited current disinflationary forces at work as the reason for further easing (weakening domestic demand, general easing of global economic activity, and tightening credit conditions). The Committee admitted that recent declines in sterling’s value will provide some inflationary stimulus and indicates that they are aware of the harmful effect slashing rates even further may have had on the pound. Perhaps there is some method to their madness.

The 50bp easing was less than some predictions, and as a result sterling enjoyed its strongest week since 1985 against the greenback, and a record weekly gain against the Euro.

While worldwide data was dire, it was the euro zone which suffered the most throughout the week. Mondays CPI reading showed that inflation had plunged below the ECB’s target rate of 2%, a significantly lower result than consensus forecast. This dovish result was in contrast to last month’s comments from ECB president, Jean-Claude Trichet, which hinted at a hold for this week’s interest rate decision. Thus, the CPI result elevated expectations of a cut on Thursday and saw the euro suffer as a consequence, giving up 3% against the dollar and 7% against sterling. German unemployment figures also revealed the first rise in unemployment for three years, which added to the Euro’s selloff.

Unemployment figures dominated the news from the US over the week, with private sector employment figures on Wednesday paving the way for another disappointing non farms employment result later in the week, revealing another 524K jobs were lost in the month of December. Barack Obama also strengthened his promises to have the chequebook open and ready for his first day in office next Tuesday.

Data out this week from the US shows trade balance, which is expected to be the worst since 2004. Advance retail sales figures will be important, as they are for the all important Christmas period. We also have the US CPI figure on Friday. It is a quiet week on the home front data wise; however we will be looking towards Europe for Thursday’s rate decision.

Trade of the Week

This week’s trade of the week is a Premium Paid Risk Reversal on GBP/EUR. This Premium Paid Risk Reversal gave the client a worst case rate of 1.10 and a best case rate of 1.25 for an upfront premium of 3.5% of the total contract amount. If, on expiry, GBP/EUR is below 1.10 the client will receive 1.10, if it is between 1.10 and 1.25 the client will buy at spot, and if above 1.25 the client has an obligation to buy at this level. For full details of this structure please contact one of our options traders on 0207 801 9050.

Have a great week

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Please feel free to contact me (rick.roache@worldfirst.com) if you have any questions or thoughts regarding these updates or if you are interested in a particular event in the calendar. If you would like to discuss your foreign exchange requirements, please contact our:

Corporate Foreign Exchange Team on 020 7801 9050 or our Private Client Currency Exchange Team on 020 7801 9080.

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Disclaimer: The above comments are only our views and should not be construed as advice. You should act using your own information and judgement. Although information has been obtained from and is based upon multiple sources the author believes to be reliable, we do not guarantee its accuracy and it may be incomplete or condensed. All opinions and estimates constitute the author’s own judgement as of the date of the briefing and are subject to change without notice.

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