Market Analysis

GBP/JPY pares some of the losses influenced by the UK CPI, although it is still significantly negative above 194.00

Amos Simanungkalit · 16 Oct12.4K Views

The GBP/JPY pair is experiencing significant selling pressure following the release of UK consumer inflation data on Wednesday, retreating further from a two-week high reached the previous day. This marks the second consecutive day of decline, with spot prices dropping to a multi-day low around the 193.70 area during the early part of the European session. Bears are now looking for a break below the 200-day Simple Moving Average (SMA) before initiating new positions.

According to the UK Office for National Statistics (ONS), the headline Consumer Price Index (CPI) remained unchanged in September, with the annual rate slowing to 1.7% from 2.2% in August. This represents the lowest level since April 2021. Additionally, Bank of England (BoE) Governor Andrew Bailey recently indicated that the central bank might cut interest rates more aggressively if inflation continues to improve. Consequently, the markets have quickly adjusted, now pricing in a 90% likelihood that the BoE will reduce borrowing costs in November, which has exerted downward pressure on the British Pound (GBP).

In contrast, the absence of detailed information regarding the overall size of fiscal stimulus from China has left investors feeling uncertain. Coupled with ongoing geopolitical tensions in the Middle East, this has negatively impacted global risk sentiment, reflected in a generally weaker tone across equity markets. As a result, the Japanese Yen (JPY), regarded as a safe haven, is benefiting and putting further pressure on the GBP/JPY pair. However, uncertainty surrounding the Bank of Japan's (BoJ) plans for interest rate hikes is likely to limit any significant upward movement for the JPY, potentially providing support for the currency pair.

From a technical standpoint, the GBP/JPY cross has been trading within a familiar range over the past two weeks, forming a rectangle pattern on the daily chart. This indicates indecision regarding the next directional move. Given the mixed fundamental factors, it may be wise to await clear follow-through selling and a sustained break below the 200-day SMA before confirming a bearish breakdown.