GBP/JPY trims a part of softer UK CPI-inspired losses, still deep in the red above 194.00

GBP/JPY attracts sellers for the second straight day in reaction to softer UK CPI print.
The data reaffirms bets for a BoE rate cut in November and weighs heavily on the GBP.
A sustained break below the key 200-day SMA should pave the way for further losses.

The GBP/JPY cross attracts heavy selling following the release of the UK consumer inflation figures on Wednesday and retreats further from over a two-week high touched the previous day. The second straight day of a downfall drags spot prices to a multi-day low, around the 193.70 area during the first half of the European session, with bears now awaiting a break below the 200-day Simple Moving Average (SMA) before placing fresh bets.

The UK Office for National Statistics (ONS) reported that the headline Consumer Price Index (CPI) remained flat in September and the yearly rate decelerated to 1.7% from 2.2% in August. This was the lowest reading since April 2021 and comes on top of the recent remarks by the Bank of England (BoE) Governor Andrew Bailey, saying that the central bank could cut interest rates more aggressively if there's further good news on inflation. The markets were quick to react and are now pricing in a 90% chance that the BoE will lower borrowing costs in November, which, in turn, weighs heavily on the British Pound (GBP).

Meanwhile, the lack of specifics about the overall size of the fiscal stimulus from China left investors uncertain. Apart from this, persistent geopolitical risks stemming from the ongoing conflicts in the Middle East take a toll on the global risk sentiment, which is evident from a generally weaker tone across the equity markets. This, in turn, benefits the Japanese Yen's (JPY) relative safe-haven status and exerts additional pressure on the GBP/JPY cross. That said, doubts over the Bank of Japan's (BoJ) rate-hike plans keep a lid on any meaningful appreciating move for the JPY and should act as a tailwind for the currency pair.

Even from a technical perspective, the GBP/JPY cross has been oscillating in a familiar range over the past two weeks or so. This constitutes the formation of a rectangle on the daily chart and points to indecision over the next leg of a directional move. Moreover, the aforementioned mixed fundamental backdrop makes it prudent to wait for strong follow-through selling and a sustained break below the 200-day SMA before confirming a bearish breakdown.

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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