GBP/JPY delivers V-shape recovery from 182.40 as investors digest UK’s soft CPI report

The GBP/JPY pair recovered vertically after discovering buying interest near the crucial support of 182.40 in the London session. The cross rebounded strongly despite the United Kingdom inflation report for August turning out soft against expectations of sticky prices.

UK’s Office for National Statistics (ONS) reported that the headline Consumer Price Index (CPI) expanded at a slower pace of 0.3%. Investors anticipated that headline inflation grew by 0.7% pace, backed by a strong rebound in energy prices due to oil rally. In July, the economic data contracted by 0.4%. On an annualized basis, the headline inflation decelerated marginally to 6.7% vs. July’s reading of 6.8% while investors saw inflation rising to 7.1%.

The core CPI that strips off volatile food and oil prices softened sharply to 6.2% against expectations and the former release of 6.8% and 6.9% respectively. This indicates that households are reluctant to spend on those goods and services whose demand can be postponed. Households’ demand for core goods eases as their real income squeezes due to higher inflationary pressures and slowing labor demand.

Softening consumer prices seems insufficient to comfort Bank of England (BoE) policymakers as the UK’s inflation is still the highest among G7 economies. Investors will keenly watch the monetary policy from the BoE, which is scheduled for Thursday. The BoE is expected to continue its policy-tightening spell straight for the 15th time and may raise interest rates by 25 basis points (bps) to 5.50%.

On the Japanese Yen front, Bank of Japan (BoJ) policymakers are working hard to get an exit from the ultra-easy monetary policy. The path towards policy normalization seems achievable now as inflation in the economy has remained above 2% for the past 15 months. For more clarity, the focus will be on the National CPI data for August, which will be published on Friday at 23:30 GMT.