GBP/JPY bulls eye a break to test the 162s with BoE and UK CPI in focus

The Great British Pound is on the form to start the week ahead of key events in the Bank of England (BoE) rate decision and inflation data, Consumer Price Index. A risk-on tone helped lift the cross, GBP/JPY, as the Swiss government-backed takeover by UBS of Credit Suisse helped to soothe some tensions in the market. Additionally, the Federal Reserve and five other central banks have announced coordinated action to improve liquidity in US dollar swap arrangements to maintain the stability of the global financial system.

At the time of writing, GBP/JPY is trading at 161.50 and has been traveling higher between a low of 158.95 and reached a high of 161.73. However, while the moves by the Swiss government and central banks are welcomed, there is still uncertainty over how the UBS and Credit Suisse deal will play out for the combined lender and the shareholders as per the implications of a ´´forced´´ merger. Moreover, the question hanging over the markets is what comes next for the wider banking system. The worry is that this may just be the tip of the iceberg.

"If you think about where we were a year ago, the Fed was just starting its rate-hiking cycle. So over the next couple of quarters you're going to get those long and variable, cumulative and lagged impacts hitting the market further," Bob Michele, the global head and CIO of fixed income at J.P. Morgan Asset Management, told Bloomberg TV. "So I think this is the tip of the iceberg. I think there's a lot more consolidation, a lot more pain yet to come."

It could be that no more banks get into trouble, but it’s also possible that “we just go from one weak institution falling over to the next,” said Vicky Redwood, senior economic adviser at Capital Economics. There no other obvious candidates that could be singled out like Credit Suisse, but it’s “hard to predict where the problems will emerge,” she said.

UK key events for the week

Meanwhile, UK inflation data on Wednesday is expected to show some easing and amid the global financial market instability. Analysts at TD Securities said that ´´headline inflation likely fell 0.2ppts in March, in line with the MPC's forecast, on the back of another decline in petrol prices. A shortage of certain vegetables and fruits adds some upside risk to the print. We also expect a rebound in hotel prices and continued strong core goods momentum to keep core inflation elevated.´´ Economists polled by Reuters expected the year-on-year CPI inflation figure to fall to 9.9% in February from 10.1% in January.

For the Bank of England, money markets are pricing in a 50% chance of no interest rate hike on Thursday and the same chance of a 25 basis-point increase. ´´Of all the major March CB decisions, the BoE was always the most uncertain, given the MPC hadn't clearly signaled another hike,´´ the analysts at TD Securities said. ´´But we think they'll still do it (barring another deterioration in financial conditions), and as before, with Bank Rate at a terminal of 4.25%, we expect this to be their last hike. It's not clear they'll be so decisive in their guidance though.´´

GBP/JPY technical analysis

The bulls are in control and eye a test of 161.70s and then the 162.20s while holding above 161.00 and 161.50 supports on the front side of the bullish opening trend. A break of 162.50 opens risk towards 163.00.