GBP/JPY rebounds from two-month low on weaker JPY; retakes 208.00 ahead of UK CPI

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The GBP/JPY cross attracts some buyers during the Asian session on Wednesday and moves away from a two-month trough, around the 207.25-207.20 area, which it touched the previous day.

GBP/JPY gains some positive traction on Wednesday amid notable JPY weakness.
The divergent BoJ-BoE policy expectations should cap the upside for spot prices.
Traders now look forward to the UK consumer inflation figures for a fresh impetus.

The GBP/JPY cross attracts some buyers during the Asian session on Wednesday and moves away from a two-month trough, around the 207.25-207.20 area, which it touched the previous day. The uptick is sponsored by a broadly weaker Japanese Yen (JPY) and lifts spot prices back above the 208.00 mark, though the broader fundamental backdrop warrants some caution for bulls.

Worries about Japan's public finances resurfaced after the International Monetary Fund (IMF) warned against cutting the consumption tax, saying that it would erode Japan's fiscal space and raise debt risks. Moreover, expectations that Japan's Prime Minister Takaichi will push back against further interest rate hikes by the Bank of Japan (BoJ) undermine the JPY amid a generally positive risk tone.

Investors, however, remain hopeful that Takaichi could be fiscally responsible and that her policies will boost the economy. This might prompt the BoJ to stick to its policy normalization path, which should limit the JPY losses. Furthermore, bets for a rate cut by the Bank of England (BoE) in March, bolstered by Tuesday's disappointing UK jobs report, undermine the British Pound (GBP) and should cap the GBP/JPY cross.

Market participants now look forward to the release of the latest UK consumer inflation figures for some meaningful impetus. Apart from this, Japan's National Consumer Price Index (CPI) and the monthly UK Retail Sales data on Friday would help in determining the near-term trajectory for the GBP/JPY cross. Nevertheless, the fundamental backdrop suggests that the path of least resistance for spot prices is to the downside.

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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