GBP/JPY – Eases from highs after weaker UK inflation data

• UK inflation unchanged in January
• Markets expect BoE rate cut in Q2
• GBPJPY pares gains after hitting 8.5 year high

UK inflation data this morning will have been a welcome surprise for the Bank of England but there’s still a long way to go.

Unfavorable base effects were expected to lift headline and core CPI last month but in both cases, they stayed at the same level. A small win but a win nonetheless for the BoE.

It was already expected to fall back to target in the second quarter before rebounding a little later in the year and this now increases the possibility of inflation undershooting the 2% target in the coming months and not rebounding as strongly.

While it’s tempting to get carried away with the release – as markets have repeatedly over the last year – the BoE will need more evidence the inflation is running lower than it assumed a couple of weeks ago before it considers cutting rates.

But based on today and if repeated in the coming months, a second-quarter cut is very possible.

An exhausted rally or temporary reprieve?

The pound fell sharply against the yen after the data and continues to trade near the day’s lows.

GBPJPY Daily

Source – OANDA

This occurred shortly after the pair hit an eight-and-a-half-year high above 190 on Tuesday, seeing resistance around the rising trend line. It initially did so with decent momentum but the inflation data may have changed that.

The first test below now becomes the November to January highs followed by the rising trendline from the early January lows. A break of these could be a very bearish development.

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