Lehman Brothers is recommending clients put on a three-month euro call spread against sterling, buying a European-style call struck at GBP0.64 and selling a call struck at GBP0.6750. The net premium the investor pays on this trade was 1.5% last Wednesday. If euro/sterling is above GBP0.6750 at maturity the trade pays out over 5% of the notional. The break even level on the trade is GBP0.6497, according to Francesca Fornasari, foreign exchange strategist in London. Spot was at GBP0.6310 when the trade was recommended last week. Lehman Brothers' three-month forecast for euro/sterling is GBP0.66.
Lehman predicts that the euro will appreciate against sterling because it is forecasting a cut in U.K interest rates relative to European rates. Michael Hume, U.K economist at Lehman Brothers, said the bank thinks there is an 80% chance the Bank of England will cut interest rates when it meets next month. The minutes of the Bank of England's Monetary Policy Committee came out on Monday and show it is leaning toward cutting rates. Hume added that German regional inflation data published on Tuesday was higher than expected. This points to the ECB raising interest rates, or at least keeping them on hold.
