GBP/JPY Dips on Surprise Jump in Japan's Inflation - Fundamental

The GBP/JPY pair experienced a significant decline below the 172.00 level, triggered by an unexpected surge in inflation rates in Japan. This sudden rise in Japan's inflation numbers, exceeding projections, is not anticipated to have an impact on the Bank of Japan's (BoJ) prolonged ultra-dovish policy stance. Market participants do not expect the Bank of England (BoE) to bring inflation down by half before the year ends.

During the Asian session, the GBP/JPY pair suffered a sharp drop after failing to sustain levels above the immediate resistance at 172.00. This downward pressure on the cross was the result of the Statistics Bureau of Japan reporting higher-than-expected inflation data for April.

The national headline Consumer Price Index (CPI) rose to 3.5% from the previous release of 3.2%, surpassing the consensus estimate of a slowdown to 2.5%. Meanwhile, the core CPI, which excludes food and energy prices, accelerated to 4.1% compared to the consensus of 3.4% and the previous release of 3.8%.

The publication of inflation numbers exceeding projections brings some relief to Bank of Japan (BoJ) policymakers, but it does not alter their prolonged ultra-dovish policy stance. BoJ's Kazuo Ueda has already indicated that inflation projections are softening, and the central bank is committed to taking necessary measures to maintain inflation steadily above the 2% target.

Meanwhile, the Pound Sterling has remained resilient in recent trading sessions due to the lack of promising signs of inflation deceleration in the United Kingdom. Investors are speculating that the Bank of England (BoE) will not be able to reduce inflation by half before the end of the year. BoE Governor Andrew Bailey has already acknowledged underestimating the strength and persistence of inflation.

Additionally, UK Finance Minister Jeremy Hunt has pledged a reduction in the tax burden on households, which is expected to further stimulate retail demand.

The UK Office for National Statistics (ONS) reported on Thursday that 18% of UK firms are planning to pass on the impact of higher input prices and increased labor costs to consumers, compared to 23% in the previous survey.

From a technical perspective, the pair rebounded from the previous resistance level, and our analysis suggests a potential pullback between the 38.2% Fibonacci level and the 61.8% level. This pullback could lead to a fresh bullish impulse aligning with the overall bullish trend observed across higher timeframes.

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