GBP/JPY recovery stalls near 200.00 as focus shifts to UK Inflation

The GBP/JPY pair struggles to extend recovery above the psychological resistance of 200.00 in Tuesday’s New York session. The cross is expected to trade sideways as investors shift focus to the United Kingdom (UK) Consumer Price Index (CPI) data for May, which will be published on Wednesday.

Economists expect that the UK Office for National Statistics (ONS) will report a sharp decline in the annual core CPI, which strips off the more volatile items, to 3.5% from 3.9% in April. In the same period, the headline inflation is expected to return to the bank’s target of 2.0% from the prior reading of 2.3%. The monthly headline inflation is estimated to have grown at a faster pace of 0.4% from 0.3% in April.

A more-than-expected decline in UK inflation data will boost expectations of early rate cuts by the Bank of England (BoE). Though headline inflation is expected to return to 2%, investors will keenly focus on service inflation, which has been a major barrier to the BoE’s move towards policy normalization.

Inflation in the UK service sector is majorly driven by strong growth, which has turned out to be persistent in the past few months. Average earnings excluding bonuses, which is a measure of wage inflation, have grown steadily by 6.0% for a straight three-period period. The pace at which wages are growing is significantly higher than what is needed to build confidence among BoE officials to consider rate cuts.

On the Tokyo front, the Japanese Yen is weak across the FX domain as the Bank of Japan (BoJ) pushes plans of tapering bond-buying operations to the July meeting. BoJ Governor Kazuo Ueda left interest rates unchanged but didn’t rule out expectations for further policy tightening in July.

This week, the major trigger for the Japanese Yen will be the National CPI data for May, which will be published on Friday. National CPI excluding Fresh Food is estimated to have accelerated to 2.6% from the prior reading of 2.2% on a year-on-year basis.