GBP/JPY sees downside below 161.50 on soaring market mood and UK political jitters

• GBP/JPY may deliver more losses on slippage below 161.50 on negative market sentiment.
• The pound bulls have faced significant offers on political instability in the UK economy.
• The inflation outlook in Tokyo may accelerate on a broad-based decline in yen.

The GBP/JPY pair is carry-forwarding the downside bias of Tuesday and is expected to extend losses after violating Tuesday’s low at 161.59. The cross has given a downside break of the minor consolidation formed in a narrow range of 161.27-161.46 in the early hour of Tokyo.

On Tuesday, the pound bears tested their two-day low at 161.57 after the warning commentary from the Bank of England (BOE). The statement from the Bank of England (BOE) that the outlook for the global economy has deteriorated materially and that volatility in the energy and raw materials cost is hinting at significant risk of disruption, which could amplify economic shocks in the future as per ANZ Research, spooked the market sentiment.

This has escalated the recession fears in the global economy and stagflation fears in the UK economy as their inflation rate has climbed above 9%. This has underpinned the risk-off impulse in the global market. Adding to that, market participants punished the sterling bulls on signs of political instability in their economy. The vice-chair of the UK Conservative Party, Bim Afolami, resigned and calls for PM Boris Johnson to stand down. The event has added severe volatility to the asset.

On the Tokyo front, rising expectations for higher price pressures have infused fresh blood in the yen bulls. Seisaku Kameda, a former chief economist at the Bank of Japan (BOJ) said that the sharp decline in yen on a broader note will lift the inflation outlook and it may remain well above 2% this year.