GBP/JPY drops to three-day lows amid a stronger yen after US CPI

• Japanese yen soars across the board after economic data.
• July US CPI rises below expectations triggering a rally in Treasuries.
• GBP/JPY trims losses after falling to as low as 161.67, the lowest since August 5.

The GBP/JPY cross lost almost 200 pips following the release of US inflation data that triggered a rally of the Japanese yen across the board. It bottomed at 161.67 and then rebounded back above 162.00.

US CPI ends a quiet period

The annual US CPI rate dropped from 9.1% to 8.5% in July, against the market consensus of 8.7%. The numbers triggered a rally in US stocks and bonds. Expectations still point to more tightening from the Federal Reserve but the doors are open to less aggressive action. Still, market participants see a rate hike of at least 50 basis points at the next meeting.

The improvement in risk appetite failed to boost GBP/JPY that pulled back amid lower yields and despite the rally of GBP/USD above 1.2200.

The GBP/JPY cross was testing the key resistance around 163.60 before the report. In the move lower, it broke 162.80 which is now the immediate resistance.

Technical indicators favor the downside in the short term. A recovery above 162.80 would put the pound back on its way for another test of 163.80. While under 162.80, the crucial area on the downside is 162.00; a break lower would expose the next support zone at 161.10.

GBP/JPY 4-hour chart