BoE tightening expectations fall following soft CPI figures of the UK

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• The GBP/JPY tallied its third daily loss in a row and slid to a daily low below 180.50.
• UK’s June CPI came in lower than expected.
• Governor Ueda hinted that the monetary policy will remain unchanged in the next meeting.

The GBP/JPY retreated to the 180.30 area and then settled around 181.60 on Wednesday as the GBP weakened agains most of its rivals following soft inflation figures from June. As markets are betting on a less aggressive Bank of England (BoE) the GBP lost interest.

The Office for National Statistics from the UK reported that the Consumer Price Index (CPI) declined to 7.9% YoY in June, lower than the 8.2% estimated and the previous 8.7%. The Core CPI dropped to 6.9%, failing to live up to the expectations of 7.1%. The Producer Price Index (PPI) also dropped but was above the market consensus at -2.7% vs the -1.6% expected.

As a reaction, UK bond yields plunged as the BoE’s tightening expectations decreased. According to the World Interest Rates Probabilities (WIRP), the odds of 50 basis points (bps) hike in the next BoE meeting in August fell near 45%. For the next meeting, hikes are priced in September, November, and in February 2024. Markets are betting on 55% odds of a final 25 bps, which would see the terminal rate peaking at 5.75% vs. 6.25% at the start of this week and 6.5% at the start of last week.

That being said, the 2-year British yield dropped to its lowest level since mid-June, around 4.85%, while the 5 and 10-year rates to 4.30% and 4.19%, respectively, with all three seeing more than 3.50% declines.

Governor Kazuo Ueda hinted there wouldn’t be a policy tweak of the Yield Control Curve amid recent speculations. He stated that inflation is well below their forecast and noted that unless that premise is “shifted” the whole story would remain unchanged. Following the comments, Japanese bond yields decreased as markets bet on a dovish BoJ making the JPY struggle to find demand.

Moreover, Thursday’s highlight will be Japan’s Trade Balance data which would give markets a better understanding of the Japanese economic situation. Exports are expected to have increased by 2.2% YoY in June, and Imports to have decreased by 11.3% YoY, resulting in a Trade Balance deficit of nearly ¥-46.7B.

GBP/JPY Levels to watch

The daily chart suggests that the technical outlook for the GBP/JPY remains bearish for the short term. Soft inflation figures from the UK made bears regains momentum and indicators took a big hit as the Relative Strength Index (RSI) points south but still positive territory, while the Moving Average Convergence Divergence (MACD) printed a higher red bar.

Support Levels: 181.00, 180.50, 179.00.
Resistance Levels: 182.25 (20-day SMA), 182.50, 183.00.

GBP/JPY Daily chart