GBP/JPY finds cushion around 167.30 as focus shifts to UK Inflation and BOE policy

• GBP/JPY is gauging support around 167.30 amid expectations of an extension in BOE/BOJ policy divergence.
• The BOE is bound to sound hawkish despite the economy falling into recession.
• Food price inflation in the UK economy is propelling consensus for headline CPI figures.

The GBP/JPY pair is gauging demand after dropping to near 167.30 in the early Asian session. The cross witnessed selling pressure after failing to cross the round-level resistance of 168.00. Meanwhile, the GBP/USD pair has corrected ahead of Federal Reserve (Fed)’s monetary policy, portraying a cautious market mood.

The cross is likely to recover sharply as the Bank of England (BOE)-Bank of Japan (BOJ) policy divergence is expected to escalate further after an interest rate hike by the United Kingdom central Bank in its last monetary policy meeting of CY2022 on December 15.

A poll on Bank of England’s interest rate hike expectations taken by Reuters states that the central bank will add another 50 basis points (bps) next week and take borrowing costs to 3.50%, despite the economy falling into recession. The rampant inflation in the United Kingdom needs further policy tightening to bring exhaustion in the inflationary pressures.

But before that, investors will focus on the UK’s inflation data, which will release on Wednesday. As per the projections, the annual inflation data for November is expected to accelerate to 11.5% vs. the prior release of 11.1%. Thanks to the fresh rise in food price inflation led by the food supply crisis amid a shortage of labor and higher input cost, which has strengthened higher expectations for the headline inflation data.

On the Tokyo front, the risk of a decline in inflation has been triggered after a contraction in Gross Domestic Product (GDP) numbers. A subdued demand never propels a hike in the price rise index. Bank of Japan (BOJ) Haruhiko Kuroda is of the view that even if wages rise by 3%, the BOJ will maintain its current easy policy until inflation reaches 2%.