The market has been nervous ahead of today’s interest rate decision from the Bank of England and rightly so. 

The expectations for a rate hike have been gradually increasing by the day as commodity prices continue to rally to new record highs which will undeniably lead to higher inflation.  It is the Bank’s job keep inflation at 2% which they haven’t been able to do as they are in the unenviable position of having to bring rising prices down during a commodity boom, whilst the UK economy is still weak.

Even though today’s decision was unchanged (“unch” means early lunch), investors are readying themselves for an eventual hike possibly in the first half of this year.  The danger of the Bank moving too early on rates though is that it could really knock the recovery off course.  We were reminded a few days ago just how fragile the UK economy is after Q4 GDP numbers showed a contraction and with government spending cuts barely even started many are calling for a hike in the latter part of 2011.  However, the market sees things differently with expectations for the first quarter point rise at some time in the Spring and we’ll certainly need action at some point this year because inflation is only going one way and that’s upwards.

There have been indications that the poor Q4 GDP number is a temporary blip as recent PMI surveys have indicated that the manufacturing and service sectors have rebounded well since the terrible weather conditions before Christmas.  Retail sales have also held up well, so the likelihood of a double dip is unlikely and we could also see upward revisions to the last GDP release.

So the FTSE is suffering from a bout of profit taking pulling us back to just below the 6000 level where for now we are just seeing a little bit of support.  A continuation of the sell off could see us test support at 5950 and below there the next support is seen on the figure at 5900.  The upward trend line that we bounced off around 5800 at the end of Jan is now around the 5875 area.

Later on today we see the weekly initial jobless claims from the US which have been averaging around 420k this year so expectations are for a similar number.

Sterling has made some ground against the euro this morning as traders fully expect the BOE to be the first central bank of the major western economies to raise rates, but interestingly it’s retreated from the 1.6100 level against the dollar and given back some of the gains against the euro as the realisation that there’s not going to be a rate hike today kicked in and the result has proved that to be the case.

Gold is suffering from a bit of dollar strength this morning and has retreated from above the 1360 mark.  We’re at 1357 so bulls just having a respite following 4% of gains in the last ten days.  1344 and 1338 are near term support levels while yesterday’s high around 1367.5 will be watched closely and a move above here might open up 1380.

Crude prices are once again mixed with Brent in the black and Nymex in the red.  Brent had a good run higher and is firmly back above the $100 level around 102.25, just off the two and a half year high it hit last week.  Nymex continues to languish in the mid 80s seemingly uninterested in Brent’s strength, but $85 remains an important support level for the crude contract.

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