GBP/JPY drops sharply below 169.00 as UK CPI lands higher at 10.1%

• GBP/JPY has slipped strongly to near 168.54 on higher-than-projected UK inflation data.
• The headline and core CPI figures have elevated by 10 bps than estimates to 10.1% and 6.5% respectively.
• Japanese yen could face more pressure post the growing risk of deflation due to external demand shock.

The GBP/JPY pair has declined to near 168.54 as the UK Office for National Statistics has reported the headline Consumer Price Index (CPI) at 10.1%, higher than the expectations of 10% and the prior release of 9.9%. Also, the core CPI has escalated to 6.5% than the projections of 6.4% and the former figure of 6.3%.

A headline CPI has recaptured the double-digit figure again, the Bank of England (BOE) policymakers could sound extremely hawkish, going forward. It is worth noting that the BOE escalated its interest rates by 50 basis points (bps) to 2.25% in its September monetary policy meeting.

On Tuesday, the BOE announced that it will start its delayed gilt sale operation from the first day of November. The operation was delayed by the central bank citing financial instability. The move will trigger liquidity squeezing from the market.

Meanwhile, UK political affairs are becoming vulnerable further as UK ministers are losing their confidence in the leadership style of UK PM Liz Truss. A YouGov poll of Tory members found that 55% would now vote for Rishi Sunak, who lost out to Ms. Truss if they were able to vote again, while just 25% would vote for Ms. Truss.

On the Tokyo front, investors have shifted to the sidelines amid anxiety over a possible Bank of Japan (BOJ)’s intervention in the currency markets to safeguard yen against speculative FX moves. Apart from that Japan’s officials have cited the risk of deflation due to global demand shocks. The situation of deflation would force the BOJ to release more liquidity into the economy.