GBP/JPY Slides as UK Inflation Miss Fuels Rate Cut Speculation

Market Overview

On Wednesday, the GBP/JPY pair faced downward pressure after lower-than-expected inflation data in the UK raised the likelihood of a rate cut by the Bank of England (BoE) in November. Before the release, market participants already had priced in an 80% chance of a 25-basis point rate cut for the upcoming month. As a result, it is expected that the likelihood of a rate cut will increase further once the London session opens, almost confirming this scenario. However, the downside for the pound may be limited, as expectations of a rate cut have already been significantly priced in by the market, muting any major reaction.

The inflation report highlighted the pressures faced by the UK economy, with overall inflation slowing down. Notably, annual inflation fell below 2% for the first time since April 2021, driven by a notable decline in the services sector, where inflation dropped from 5.9% to 5.6%. Core inflation (excluding food and energy) also saw a significant reduction, declining from 5.6% to 4.9%. This development is a positive sign for the BoE as it contemplates its monetary policy path, but it also contributed to selling pressure on the pound.

Technical Analysis

On the four-hour chart, GBP/JPY recently completed a one-month uptrend, forming a triangle pattern at the top of the range. Sellers initiated a strong move in early Wednesday trading, breaking through the triangle pattern and breaching the ascending trendline. This bearish breakout pushed the price below its moving averages, targeting the first key support level at 193.566.

If sellers manage to break decisively below this support level, it will likely pave the way for a new bearish trend, with subsequent targets at 192.983, 192.242, 191.424, and ultimately 190.100. The bearish outlook is confirmed by momentum indicators—RSI is currently in bearish territory, signaling that selling pressure dominates the market, while the MACD also remains in negative territory, pointing to ongoing bearish momentum.

Currently, GBP/JPY is also trading below its moving averages, reinforcing the bearish bias. The moving average crossover remains mixed, indicating that there may still be volatility as the market digests recent economic data and prepares for further movement.

Alternative Scenario

If buyers manage to defend the support level at 193.566, the price may recover towards resistance levels at 194.384 and 195.708. For the uptrend to resume, buyers need to push the price above these key resistance levels, particularly the 195.708 mark, which would invalidate the bearish scenario and indicate a potential return to the previous upward trend.

Key Levels Overview

Resistance Levels:

• Resistance 2: 195.708
• Resistance 1: 194.384

Current Price: 193.588

Support Levels:

• Support 1: 193.566
• Support 2: 192.983
• Support 3: 192.242
• Support 4: 191.424
• Support 5: 190.100

Key Events to Watch

The release of UK inflation data was crucial for the market as it provided insight into the health of the British economy. Notably, the headline annual inflation rate fell below the 2% target for the first time since April 2021. The decline in inflation for the services sector, down from 5.9% to 5.6%, and the drop in core inflation from 5.6% to 4.9%, mark a significant slowdown in price pressures across the economy. This could provide the Bank of England with a stronger case for easing monetary policy and potentially cutting interest rates in the coming months.

Additionally, investor attention will shift towards any upcoming remarks from BoE officials that could further clarify the central bank’s position on rate cuts. Moreover, UK labor market data scheduled for release on Tuesday will also be closely watched. If these reports point to a softening labor market, it could reinforce expectations for a rate cut, putting further pressure on the pound.

Conclusion

GBP/JPY has entered a critical phase, with the pair trading near key support at 193.566 following disappointing UK inflation data. If sellers can successfully push the price below this level, it could open the door for a sustained move towards lower support levels at 192.242 and 190.100, confirming a new bearish trend. On the other hand, should buyers step in and hold the line, the pair could see a recovery towards 194.384 and beyond.

With key UK labor market data and potential comments from BoE officials on the horizon, traders should brace for possible volatility in the coming days. The broader narrative remains focused on whether the BoE will proceed with a rate cut amid signs of slowing inflation, and how this could further impact the pound’s valuation against the yen.

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