GBP/JPY slides back below 195.00 ahead of UK inflation data; downside seems limited

GBP/JPY turns lower for the second straight day, though it lacks follow-through selling.
Reduced bets for aggressive BoE rate cuts in 2025 underpin the GBP and lend support.
Expectations that the BoJ will keep rates steady keep the JPY bulls on the defensive.
The technical setup supports prospects for the emergence of dip-buying at lower levels.

Haresh Menghani FXStreet

The GBP/JPY cross attracts some intraday sellers following an Asian session uptick to the 195.50 region and turns lower for the second successive day on Wednesday. Spot prices, however, remain close to a nearly four-week high touched on Tuesday and currently trade just below the 195.00 psychological mark as traders now look to the UK Consumer Price Index (CPI) report for a fresh impetus.

A stronger UK wage growth data released on Tuesday justified the need for the Bank of England (BoE) to keep rates on hold at its meeting on Thursday and forced investors to trim their bets for three 25 basis points rate reductions next year. This might continue to act as a tailwind for the British Pound (GBP). Furthermore, expectations that the Bank of Japan (BoJ) will not hike interest rates at the conclusion of the December policy meeting keep the Japanese Yen (JPY) bulls on the defensive and should act as a tailwind for the GBP/JPY cross.

From a technical perspective, this week's breakout through the very important 20-day Simple Moving Average (SMA) was seen as a fresh trigger for bulls. Moreover, oscillators on the daily chart have just started gaining positive traction and are still away from being in the overbought territory. This, in turn, validates the near-term positive outlook for the GBP/JPY cross and supports prospects for the emergence of dip-buyers at lower levels. That said, failure near the 61.8% Fibonacci retracement level of the October-December fall warrants caution.

Nevertheless, any further decline is more likely to find support near the 194.45 horizontal zone ahead of the 194.00 mark, or the 50% Fibo. level. Some follow-through selling could make the GBP/JPY cross vulnerable to accelerate the fall towards the 193.40 intermediate support en route to the 193.192.95 region and the 38.2% Fibo. level, around the 192.60-192.55 zone.

On the flip side, sustained strength and acceptance above the 195.50 area, or the 61.8% Fibo. level, will reaffirm the positive outlook and lift the GBP/JPY cross to the 196.00 round figure. The momentum could extend further towards the 196.65 hurdle en route to the 197.00 mark and the 78.6% Fibo. level, around the 197.30-197.35 region.

GBP/JPY daily chart

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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