GBP softer after CPI surprise, JPY focused on any further hints from Ueda
12:42, 20 September 2023
The British pound (GBP) is struggling to find its footing this morning as traders digest the latest round of inflation data. The top-line takeaway is positive for the economy, with CPI falling for the third month in a row to 6.7%, the lowest level since March last year. This drop has likely come as a surprise to markets, as expectations were for a rise to 7.1% – mostly brought on by the wage growth data released earlier in the month, which showed continued price pressures.
But despite the data being favourable to the economy, it seems to have made traders wary of the Bank of England’s action at their meeting on Thursday. Governor Bailey and his team have shown reluctance to showcase a restrictive stance in the past – and that was when the data warranted restrictive policy action. Now that inflation has continued to drop, even when most believed it would rise, it’s fair to assume that traders are concerned that the BoE may take their foot off the hiking pedal prematurely.
This has caused markets to reduce the assigned probability of a 25bps hike at the meeting on Thursday to 50%, after the CPI data release from 79% the day prior. The drop in inflation has also shifted the expected rate curve, highlighting the perception that the BoE will be less restrictive going forward than originally thought.
GBP OIS (Overnight Index Swap) curve reflecting the shift in rate expectations post CPI data.
GBP/USD saw a knee-jerk reaction lower after the data release but has slowly come off the lows since then. The path of least resistance continues to aim lower, but the RSI is about to enter into oversold territory, which could offer further support from buyers. But a possible bullish reversal is unlikely to last unless markets are convinced that the BoE is adamant in combatting persistently elevated inflation.
GBP/USD daily chart
Another central bank that has been in the spotlight this week is the Bank of Japan (BoJ). Since taking over in April, Governor Ueda has shown a deviation in policy stance from his predecessor Kuroda, who had adopted an ‘ultra-loose’ approach to try and shake the economy out of a lethargic state of deflation.
So far, minimal policy changes have taken place. But markets are becoming increasingly confident that a rate hike is near, which would start a period of policy normalisation as inflation in Japan has risen above 1.5% for the first time in a decade. For now, it seems like markets predict the end of negative rates – currently at -0.1% – in early 2024.
JPY OIS, reflecting the expected future path or rates in Japan
But all this talk about possible policy change and further intervention to keep the Yen from weakening further has allowed the Japanese currency to find some footing and halt some of the recent declines, especially against the British pound, which has been suffering the consequences of an overly complacent BoE.
GBP/JPY has been turning lower since hitting a seven-and-a-half-year high in August, around 186.85. The pattern of lower highs has been shaping the move lower, with the RSI now hovering just below the 50 mid-line, suggesting a lack of short-term direction. The BoE and BoJ meetings on Thursday and Friday this week are likely to be the catalysts to decide where the next move will be.
GBP/JPY daily chart