More GBP losses ahead of king 8217 s testimony and vindication

The sharp slowdown in the United Kingdom inflation to a 14-month low of 3.6% year-on-year in January from 4.2% year-on-year in December offers Bank of England Governor Mervyn King more vindication ahead of tomorrow’s testimony before the treasury select committee immediately after the release of the BoE’s quarterly inflation report.

The removal of the 2010 VAT impact from the year-on-year comparison shall further drag down the 2012 inflation figures towards the BoE’s 2.0% objective. With a little help of sub part growth and a five percent increase in the trade-weighted index value of the British pound, CPI could well fall under three percent before year-end, with the two percent target likely by end of 2013. All of this makes tomorrow’s testimony likely fitting he pattern of the past two years; Pound falling during the week in the aftermath of each quarterly Bank of England report. This time, King’s reiterating of the central bank’s one percent GDP growth outlook for 2012 and projecting the two percent inflation target before year-end carries more credibility and will likely trigger broader selling in the GBP.

Last Thursday we made the case for favouring EUR/GBP on the basis of QE3 being followed by further asset purchases as the BoE attempts to stimulate growth with the green light from lower inflation and currency robustness over the last six months. EUR/GBP has remained supported above 0.8350, eyeing 0.8450s.

More importantly, GBP/USD suffers from series of lower highs and deteriorating stochastics, all of which point towards the $1.55 level. Favouring GBP vs. USD emerges especially on the S&P500 expected inability to regain the 1363 resistance by 76% retracement of the decline from the 2007 all time high to the March 2009 low.

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