GBP/JPY rebounds from 160.00 as investors digest BoE’s dovish guidance, Japan CPI eyed

• GBP/JPY has sensed buying interest near 160.00 as investors digest dovish guidance from BoE on interest rates.
• An absence of inflation softening in the UK despite pushing rates to 4.25% could create vulnerabilities ahead.
• Japan’s inflation is expected to cool off due to moderation in oil prices.

The GBP/JPY pair has sensed a buying interest after crashing to near 160.00 in the early Asian session. The cross has found a cushion as investors have digested the dovish commentary on interest rate guidance from the Bank of England (BoE).

Notable persistent inflation in the United Kingdom economy led by higher food prices, shortage of labor, and recent higher energy costs has been creating a mess for the BoE policymakers for a longer period.

In spite of a dismal economic outlook and global banking fiasco, BoE Governor Andrew Bailey went for an eleventh consecutive rate hike as inflationary pressures are getting beyond their control. Out of the seven-member team, Monetary Policy Committee (MPC) members Swati Dhingra and Silvana Tenreyro voted for an unchanged monetary policy while others favored a 25 basis point (bp) rate hike.

On the inflation guidance, BoE said that Consumer Price Index (CPI) figures would start scaling lower from the second quarter. They further added that Wednesday’s surprise jump in the price index was the outcome of volatile clothing prices, which could prove less persistent.

Analysts at Danske Bank consider that both growth and domestic inflation have surprised to the upside and given BoE’s message, they pencil in an additional 25 bps hike in May 2023.

On Friday, volatility from the Pound Sterling would continue as UK Office for National Statistics will report the Retail Sales (Feb) data. The economic data is expected to expand by 0.2% vs. 0.5% reported earlier. On an annual basis, a contraction is expected by 4.7%.

Meanwhile, the Japanese Yen will remain in action ahead of the release of the inflation data. Analysts at Standard Chartered expect “Headline CPI inflation to have expanded to 3.3% YoY, down from 4.3% in January. Similarly, core CPI inflation excluding fresh food may also have increased to 3.2%, less than 4.2% prior. However, core CPI excluding food and energy likely grew by 3.4% YoY in February, higher than 3.2% prior. The moderation in headline and core CPI inflation is mainly due to the base effect of oil prices, as per their view.