BOE Quarterly Inflation Report Expected To Be Sharply Downgraded…

(UK) Former BoE inflation hawk Sentance questions if the MPC has gotten inflation under control.

• Says despite the recent declines seen in inflation, there are various factors which could cause prices to rebound including a reversal in the declines of energy prices and additional easing measures by the BoE.
• Cites the increase in services sector prices.
• Suggests the upcoming BoE inflation report (due this week) is expected to project a further reduction in H2 inflation.

(UK) BOE expected to sharply downgrade its growth and inflation forecasts as part of its quarterly Inflation Report to be published on Wednesday – UK press.

• 2012 GDP target likely to be cut to near flat vs 0.7% prior target. 
• 2013 GDP target may be cut to about 1.5% from over 2% prior.
• May forecast inflation to fall below 2% by year end from the current 2.4% level.

INSIGHT: The previous BOE Quarterly Inflation Report from May 16th: 

• Raised inflation forecast, now seen above 2% for the next year or so. 
• Inflation seen above 2% until Q3 2013 (vs Feb forecast of until Q4 2012)
• Inflation report chart shows CPI at around 1.6% in 2 years and at 1.8% in 3 years assuming market interest rate path and steady AFT at £325B
• Saw economy growing at y/y rate of 1.25% in Q4 2012 (prior forecast was 1.95%)
• BoE chart showed annual GDP growth around 2.7% in 2 years, assuming market rate path (Feb forecast was 2.94%)
• UK GDP would not be above pre-crisis peak until 2014.

How to interpret these headlines?

BOE Quarterly Inflation Report is scheduled on Wednesday this week and it is usually a strong market mover, especially when rumors are flying wild before the scheduled release time.  In the case of this upcoming release, I believe the market should be pricing in a more dovish tone report, thus increase the chances of pre-selling on the GBP, therefore I’d recommend to go LONG on the EURGBP as the Euro is now picking up momentum from risk appetite sentiment.  I wouldn’t be surprised to see EURGBP around the 0.84 ~ 0.90 levels by the year end.

Considering that OECD, IMF, and even some private institutions have already downgraded their asessments of UK’s GDP for 2012 from +0.5% to -0.5%, I really don’t see much risk in EURGBP to drop down and retest the 0.77 level, but the potential to go up above the 0.8000 level is high, especially with ECB’s pledge to “do whatever it takes” to solve the EU crisis…