GBP/JPY drops 100 pips below 181.00 due to poor UK inflation, yields

The GBP/JPY currency pair saw a considerable drop of 100 pips to below 181.00, driven primarily by disappointing UK inflation data and weaker Treasury bond yields. The pair dipped further to around 180.80 in the early hours of Wednesday morning in London, reflecting the market’s reaction to these economic indicators. This decline has been amplified by cautious market optimism and a dovish perspective on the Bank of Japan (BoJ).

In June, the UK’s Consumer Price Index (CPI) inflation fell short of expectations, dropping to 7.9% Year-on-Year (YoY), compared to the anticipated 8.2% and the previous figure of 8.7%. A similar trend was observed in the Core CPI, which slipped to 6.9% YoY, moving against market predictions and previous readings of 7.1%.

This downturn in inflation rates has thrown into question the previously hawkish sentiment surrounding the Bank of England (BoE). The uncertainty has contributed to the GBP/JPY’s three-day losing streak, highlighting the sensitivity of the currency pair to changes in economic conditions.

Alongside this, BoJ Governor Kazuo Ueda defended the bank’s easy-money policy at a G20 meeting in India. He acknowledged that achieving the 2% inflation target sustainably remains a distant goal for the central bank, thus reinforcing a dovish outlook.

Simultaneously, the political landscape in Japan is causing a stir in the financial markets. Concerns over Japan PM Fumio Kishida’s cabinet reshuffle and growing industrial pessimism in Tokyo are exerting pressure on the Japanese Yen (JPY), presenting a challenge to the GBP/JPY downtrend.

Despite these setbacks, market sentiment remains cautiously optimistic. Equities have been performing well due to positive news from the banking sector and significant developments in China, providing some support to the GBP/JPY prices.

The performance of global stock markets also plays a role in shaping market sentiment. With Japan’s Nikkei 225 index rising more than 1.0% and the S&P500 Futures holding steady at the yearly high, investors are showing signs of confidence. However, the US 10-year and two-year Treasury bond yields remain subdued at 3.76% and 4.74%, indicating continued caution in the market.

Following the initial market reaction to the UK inflation data, GBP/JPY traders are now turning their attention to upcoming economic reports. Specifically, they will be closely watching risk catalysts ahead of Friday’s release of Japan’s inflation statistics and British Retail Sales data. These figures could potentially drive significant movements in the GBP/JPY pair, depending on whether they align with or defy market expectations.