Sterling & UK CPI

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The sharp slowdown in UK inflation to a 14-month low of 3.6% y/y in January from 4.2% y/y in December offers Bank of England Governor Mervyn King more vindication ahead of tomorrows testimony before the treasury select committee immediately after the release of the BoEs quarterly inflation report.

THE REMOVAL OF THE 2010 VAT impact from the y/y comparison shall further drag down the 2012 inflation figures towards the BoEs 2.0% objective. With a little help of sub part growth and a 5% increase in the trade-weighted index value of the British pound, CPI could well fall under 3% before year-end, with the 2% target likely by end of 2013. All of this makes tomorrows testimony likely fitting he pattern of the past 2 years; Pound falling during the week in the aftermath of each quarterly Bank of England report. This time, Kings reiterating of the central banks 1% GDP growth outlook for 2012 and projecting the 2% inflation target before year-end carries more credibility and will likely trigger broader selling in the GBP.

In last THURSDAY's PREMIUM INTERMARKET INSIGHTS SEE HERE: http://ashraflaidi.com/products/sub01/access/?a=602 we made the case for favouring EURGBP 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 6 months. EURGBP has remained supported above 0.8350, eyeing 0.8450s.

GBPUSD TECHNICALS: More importantly, GBPUSD 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 resistancethe 76% retracement of the decline from the 2007 all time high to the March 2009 low.