US CPI: Sterling's resilience could push GBP/JPY to 188.70

The sterling is heading into the US session on a strong footing after the data released by the UK Office for National Statistics showed the economy stayed in deflation for the second consecutive month, but the core inflation ticked higher.

Increasing focus on core inflation

The central banks across the advanced world may have done fighting with lower headline inflation due to weaker energy prices. The Bank of Japan (BOJ) is the first central bank to have thrown in the towel in October, when it indirectly made it clear that prospects of fresh QE are low so long as the low inflation is due to energy prices.

A similar stance is likely to be adopted by other central banks; especially the ones who are through with ZIRP and QE. Consequently, the core inflation will be tracked more religiously by the markets.

The core number is seen remaining unchanged at an annualised rate of 1.9% in the US. Meanwhile, the headline figure is seen rising 0.2%m/m and 0.1% y/y.

Weak US CPI could be non-event for Yen, but positive news for GBP

A weaker-than-expected headline CPI figure could very well turn out to be non-event since the December liftoff is pretty much a done deal now. Even the treasury market volatility has decreased to its lowest level this year. The Bank of America Merrill Lynch MOVE Index, which measures price swings in US debt, fell to 67.69 basis points on Monday, the least since Dec. 26. This is a sign that the uncertainty over the direction of the Fed policy no longer exists and that the markets are prepared for the December liftoff.

It means the USD could witness a minor correction on weak CPI/core CPI, but the overall trend stays bullish till Dec 17 Fed meeting. Consequently, weak number could be a non-event for the markets.

However, the GBP could strengthen on weak US CPI/core CPI since the currency is on a strong footing today on account of the uptick in the core inflation figure.

In case the US CPI report blows past expectations, the greenback stands to gain across the board. But again, the gains in the USD/JPY pair could be much higher than the losses in GBP/USD, thereby keeping the GBP/JPY upbeat. The gains in the stock markets also mean the Yen is likely to remain under pressure.

GBP/JPY - Eyes Rising channel resistance on 4-hour chart

• The cross is hovering around a strong resistance at 187.50. Since 25th August, the pair has failed to see a daily close above 187.50.

• Sterling’s rejection at 187.50 on Thursday, followed by dip to and a bounce back from the 200-DMA at 185.99on Monday has opened doors for a break above 187.50 levels and rise towards the channel resistance at 188.70.

• Meanwhile, a failure to see a daily close above 187.50 today could push the pair back to its 200-DMA at 184.99. However, the odds of a bearish move are low.