GBP/JPY clings to gains above 208.00 despite weak UK inflation data

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The Pound (GBP) has been little moved following a string of UK inflation figures for January and remains trading right above 208.00 against the Japanese Yen (JPY), with the two-month lows of 207.22 at a short distance.

GBP/JPY is trading at 208.00 with the two-month low at 207.22 at hand.
UK inflation contracted in January amid a significant decline in retail prices.
Yen recovery lost momentum earlier this week, following weak Japanese GDP figures.

UK Consumer Price Index (CPI) released earlier on Wednesday has shown a significant decline in inflation, providing some leeway for the Bank of England (BoE), to ease its monetary policy further. Headline inflation contracted 0.5% in January, reversing a 0.4% advance in December, while yearly inflation eased to 3.0% from 3.4% in the previous month, figures in line with the market consensus.

UK retail prices dropped sharply in January

The soft inflation figures have been driven mostly by a sharp decline in retail prices. January’s Retail Price Index has dropped 0.5% on the month and slowed down to a 3.8% yearly growth after growing 0.7% and 4.2% respectively in December.

Producer prices have been mixed, with the Input PPI bouncing up 0.4% after a 0.5% contraction last month and falling 0.2% from January last year. Output prices, however, have stalled in January and slowed down to a 2.5% yearly growth from 3.1% last month.

In Japan, data released on Wednesday revealed the Merchandise Trade Balance improved for the fifth consecutive month, although the weak Japanese Gross Domestic Product (GDP) figures released earlier in the week keep weighing on Yen rallies.

Economic Indicator

Consumer Price Index (MoM)

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 also the inflation measure used in the government’s target. The MoM figure compares the prices of goods in the reference month to the previous month. Generally, a high reading is seen as bullish for the Pound Sterling (GBP), while a low reading is seen as bearish.

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.