GBP/JPY flat-lined below multi-year tops, downside seems limited

• Softer UK CPI report prompted some profit-taking around GBP/JPY on Wednesday.
• The recent widening of the UK-Japanese yield spread acted as a tailwind for the pair.
• BoE rate hike bets support prospects for the emergence of dip-buying at lower levels.

The GBP/JPY cross reversed an early European session dip to the 157.40 area and was last seen trading in the neutral territory, around the 157.70-65 region.

The British pound edged lower on Wednesday following the release of softer-than-expected UK consumer inflation figures, which, in turn, prompted some profit-taking around the GBP/JPY cross. The UK Office for National Statistics (ONS) reported that the headline CPI edged lower to 3.1% YoY rate in September as against 3.2% expected and previous.

Adding to this, the core inflation gauge (excluding volatile food and energy items) decelerated to 2.9% YoY last month from 3.1% reported in August, again falling short of consensus estimates. The data might have forced investors to trim their bets for an imminent rate hike by the Bank of England in November and acted as a headwind for the sterling.

The GBP/JPY cross retreated around 80 pips from the 158.20 region, or the highest level since June 2016, though lacked any follow-through and found a decent support near the 157.40 region. The recent widening of the UK-Japanese government bond yield differential continued weighing on the Japanese yen and helped limit any deeper pullback from the cross.

Moreover, investors still seem convinced about an imminent BoE rate hike in 2021. This was seen as another factor that extended some support to the GBP/JPY cross, though overbought conditions held traders from placing fresh bullish bets. Nevertheless, the bias remains tilted in favour of bulls and supports prospects for the emergence of some dip-buying at lower levels.

Technical levels to watch