GBP/JPY gains a lift after UK consumer price data and fall in safe-haven flows

GBP/JPY trades higher by about two-thirds of a percent in the 197.30s on Wednesday, after the release of higher-than-expected UK inflation data cemented bets the Bank of England (BoE) will leave its key bank interest rate at a relatively high 4.75% at its December policy meeting, and take a gradual approach to cutting interest rates in the future. Since higher interest rates usually increase foreign capital inflows thereby strengthening a currency, the news helped lift the Pound Sterling (GBP), and has led to a rise in GBP/JPY.  

The UK Consumer Price Index (CPI) inflation gauge rose by 2.3% year-over-year in October, well above the 1.7% of September, and expectations of 2.2%. Core CPI inflation rose by 3.3% YoY from 3.2% prior and 3.1% expected. 

After the CPI release, the market implied trajectory for UK interest rates showed the BoE’s bank rate would likely fall 15 basis points (bps) (0.15%) over the next three months and 60 pbs over the next 12 months. This suggests the chances of the BoE cutting by 25 bps in December are slim, according to Rabobank.

The Japanese Yen (JPY) meanwhile loses ground on Wednesday due to a reduction in safe-haven flows on the back of an improvement in risk appetite. The Yen had temporarily strengthened on Tuesday due to a ratcheting up of geopolitical risks. The source for this was Russia’s announcement that it had lowered the bar for the deployment of nuclear weapons. The move was interpreted as a warning in response to the US agreeing to allow Ukraine to use US-made missiles to strike targets in Russia. 

Uncertainty over when the Bank of Japan (BoJ) will next raise its key interest rate from a comparatively low 0.25% is capping upside potential for the Yen, whilst providing a boost for the GBP/JPY pair given the large differential which favors inflows into the Pound. 

On Tuesday Japan’s Finance Minister Katsunobu Kato said he is “closely watching FX moves with the utmost sense of urgency.” This suggests a risk that the authorities are planning an intervention to help support the Yen. However, according to Bloomberg News, the Yen is actually still relatively strong on a trade-weighted basis compared to the levels it fell to in July 2024 when the Japanese authorities last made a direct market intervention to prop up their currency.