GBP/JPY rises to near 189.00 despite a downbeat UK inflation report

GBP/JPY gains ground despite lower-than-expected Consumer Price Index data from the United Kingdom.
UK Consumer Price Index rose at 2.2% YoY in July, against the expected 2.3% growth.
The downside of the Yen could be limited due to safe-haven flows amid rising Middle-East tensions.

GBP/JPY extends its winning streak for the third consecutive session, trading around 189.00 during the early European session on Wednesday. This upside came despite a lower-than-expected Consumer Price Index (CPI) report released by the United Kingdom (UK) Office for National Statistics (ONS), which has increased the likelihood of interest-rate cuts by the Bank of England (BoE).

In July, the UK Consumer Price Index (CPI) increased by 2.2% year-on-year, up from 2.0% previously. This reading fell short of the market expectation of 2.3% growth, moving slightly above the Bank of England’s (BoE) 2.0% target.

Meanwhile, Core CPI, which excludes volatile food and energy items, rose by 3.3% year-on-year, down from 3.5% previously and below the market consensus of 3.4%. On a monthly basis, CPI decreased by 0.2%, following a 0.1% increase in June.

The upside of the GBP/JPY cross could be retrained as safe-haven flows may have strengthened the Yen amid escalating geopolitical tensions in the Middle East. The BBC reported on Tuesday that the United States deployed a guided missile submarine to the region.

Additionally, Israeli forces continued their operations near Khan Younis in southern Gaza on Monday. According to CBC News, Palestinian medics reported that Israeli military strikes on Khan Younis on Monday resulted in at least 18 fatalities.

The rising expectations of the Bank of Japan (BoJ) to hike rates again in 2024 provide support for the Japanese (Yen). Japan's parliament is scheduled to hold a special session on August 23 to discuss the Bank of Japan's (BoJ) decision to raise interest rates last month.

Economic Indicator

Consumer Price Index (YoY)

The United Kingdom (UK) 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. It is the inflation measure used in the government’s target. The YoY reading compares prices in the reference month to a year earlier. 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.

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