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GBP/JPY surges on higher UK inflation and lower risk aversion ahead of BoE

The British pound surged on Tuesday after a key UK inflation measure in the form of the Consumer Price Index came out at +2.9% year-over-year for August, higher than both the +2.8% expected and the +2.6% reading from the previous month. This higher-than-expected inflation data is likely to prompt a more hawkish stance from the Bank of England when the central bank provides its monetary policy summary and bank rate decision on Thursday. As a result of the CPI release, the pound rose sharply against the US dollar, euro, and yen, among others.

While the US dollar saw a rebound in the beginning of the week that remained mostly intact on Tuesday, the Japanese yen has seen a sharp decline during the first two days of the week as demand for the safe-haven currency has fallen amid dissipating market risk concerns. This decline in risk aversion that has pressured the yen combined with the surge in sterling on Tuesday to prompt a sharp rise for GBP/JPY above the key 145.00 level.

Provided that the UK jobs data to be released on Wednesday paints a relatively positive employment picture, the Bank of England should have little reason to remain dovish on Thursday given the specter of rising inflation. As for Wednesday’s jobs-related data, the average earnings index is expected to have risen by 2.3%. The claimant count is expected to have risen by 5.3K in August after the previous month’s -4.2K drop. The unemployment rate for July is expected to have remained steady at 4.4%.

Assuming the absence of any substantially negative deviations from these employment expectations, especially with respect to the average earnings index, a Bank of England policy statement that skews to the hawkish side (even if interest rates remain unchanged, as expected) is likely to boost the pound and GBP/JPY even further. Provided the currency pair remains above the key 145.00 level, the next major upside target amid the UK jobs data and BoE decision is at the key 148.00 level, which is a major resistance level that has been tested and respected three times within the past year.

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