GBP/JPY gains a lift after UK consumer price data and fall in safe-haven flows

GBP/JPY rises as a result of a mixture of higher-than-expected UK data and lower safe-haven flows into JPY. 

UK inflation data beat expectations, increasing bets the Bank of England will leave interest rates at relatively high levels. 

The differential between the two country’s interest rates – 4.75% for the UK and 0.25% for Japan, lends a bullish bias to the pair. 

GBP/JPY trades higher by about two-thirds of a percent in the 197.30s on Wednesday, after the release of higher-than-expected UK inflation data cemented bets the Bank of England (BoE) will leave its key bank interest rate at a relatively high 4.75% at its December policy meeting, and take a gradual approach to cutting interest rates in the future. Since higher interest rates usually increase foreign capital inflows thereby strengthening a currency, the news helped lift the Pound Sterling (GBP), and has led to a rise in GBP/JPY.  

The UK Consumer Price Index (CPI) inflation gauge rose by 2.3% year-over-year in October, well above the 1.7% of September, and expectations of 2.2%. Core CPI inflation rose by 3.3% YoY from 3.2% prior and 3.1% expected. 

After the CPI release, the market implied trajectory for UK interest rates showed the BoE’s bank rate would likely fall 15 basis points (bps) (0.15%) over the next three months and 60 pbs over the next 12 months. This suggests the chances of the BoE cutting by 25 bps in December are slim, according to Rabobank.