GBP/JPY aims to extend recovery above 163.50, spotlight is on UK GDP

• GBP/JPY is expected to extend their gains above 163.50 on higher UK inflation expectations.
• The UK economic data comprising GDP, Industrial Production, and others are likely to remain downbeat.
•  Japan’s Overall Household Spending improved to 3.5% vs. -0.5% and the expectations of 1.5%.

The GBP/JPY pair has given an upside break of the consolidation formed in a narrow range of 162.80-163.20 in the Asian session. The cross has turned positive as investors have ignored the soaring inflation expectations guided by the Bank of England (BOE) in its monetary policy meeting last week.

BOE Governor Andrew Bailey warned the investing community that the inflation rate could reach 13% due to volatile oil and food prices. The runaway inflation is now turning into a galloping one and the BOE is carrying less potential for tightening its policy aggressively. The BOE announced a 50 basis point (bps) interest rate hike and has elevated the rates to 1.75%.

Thanks to the subdued economic data and the ongoing political instability after the resignation of UK PM Boris Johnson, which have created a bummer situation for the BOE. In case of the occurrence of an inflation rate near 13%, a situation of recession in the UK economy is highly likely.

Going forward, the UK Gross Domestic Product GDP) data will be of utmost importance. As per the market consensus, the economic data is expected to shift downward to 2.8% from the prior release of 8.7 on an annual basis for the second quarter of CY2022. Also, the other economic data are expected to display an underperformance.

On the Tokyo front, the Overall Household Spending has improved dramatically to 3.5% from the prior release of -0.5% and the expectations of 1.5%. This may support the yen bulls as the economic data is an inflation indicator. A decent improvement in the economic data advocates that the inflation rate may accelerate further. However, the data could be driven majorly by soaring energy bills. Still, to keep the inflation rate above 2%, an increase in Labor Cost Index is imminent.