GBP/JPY struggles to capitalize on post-UK CPI rise, down a little above 187.00

GBP/JPY recovers early lost ground following the release of the UK consumer inflation figures.
The headline UK CPI held steady at 2.2%, while the core CPI accelerated to the 3.6% YoY rate.
The upside remains capped as traders await the BoE and the BoJ monetary policy meetings.

Haresh Menghani FXStreet

The GBP/JPY cross attracts some dip-buyers following an intraday slide to the 185.80 area and climbs to the top end of its daily range during the first half of the European session on Wednesday. Spot prices currently trade around the 187.25-187.30 region, just below a one-week high touched on Tuesday, though the fundamental backdrop warrants caution before positioning for an extension of this week's bounce from the vicinity of the monthly low.

The British Pound (GBP) rallies across the board following the release of the UK Consumer Price Index (CPI) report, which fueled expectations that the Bank of England (BoE) would hold rates steady and acted as a tailwind for the GBP/JPY cross. In fact, the UK Office for National Statistics (ONS) reported that the core CPI (excluding volatile food and energy items) accelerated to the 3.6% YoY rate in August from 3.3% previous.

Adding to this, the UK August Services CPI inflation climbed 5.6% during the reported period compared to 5.2% in July, and the headline print held steady at 2.2%. This, in turn, raises hopes that the BoE's rate-cutting cycle is more likely to be slower than in the United States (US) and the Eurozone. The upside for the GBP/JPY cross, however, remains capped as traders seem reluctant ahead of the key central bank event risks.

The BoE is scheduled to announce its decision on Thursday, and the market pricing suggests a little chance of an interest rate cut, though the possibility of a reduction in November remains on the table. The focus will then shift to the Bank of Japan (BoJ) policy update on Friday, which will play a key role in influencing demand for the Japanese Yen (JPY) and help in determining the next leg of a directional move for the GBP/JPY cross.

Hence, a strong follow-through buying is needed to confirm that spot prices have formed a near-term bottom around the 183.70-183.75 region, or a one-month low touched last Wednesday. Nevertheless, the GBP/JPY cross, for now, seems to have snapped a two-day winning streak ahead of the BoE and the BoJ meetings. In the meantime, the critical Fed decision might infuse some volatility and produce short-term opportunities.

(This story was corrected on September 18 at 11:10 GMT to say that BoE is scheduled to announce its decision on Thursday, not Wednesday.)

Economic Indicator

Core Consumer Price Index (YoY)

The United Kingdom (UK) Core Consumer Price Index (CPI), released by the Office for National Statistics on a monthly basis, is a measure of consumer price inflation – the rate at which the prices of goods and services bought by households rise or fall – produced to international standards. The YoY reading compares prices in the reference month to a year earlier. Core CPI excludes the volatile components of food, energy, alcohol and tobacco. The Core CPI is a key indicator to measure inflation and changes in purchasing trends. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

Why it matters to traders?

The Bank of England is tasked with keeping inflation, as measured by the headline Consumer Price Index (CPI) at around 2%, giving the monthly release its importance. An increase in inflation implies a quicker and sooner increase of interest rates or the reduction of bond-buying by the BOE, which means squeezing the supply of pounds. Conversely, a drop in the pace of price rises indicates looser monetary policy. A higher-than-expected result tends to be GBP bullish.

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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