GBP/JPY at 7 ½ Year High Ahead of CPI, BOE

The BOE is expected to hike again at the next meeting, with the CPI figures potentially giving signs for what will happen next.

The Hike Appears to Be in Already

There is unanimous agreement that the BOE will hike at the next meeting, and leave rates at 4.75%. The disagreement is around what comes after, and traders are likely to be keenly focused on the monetary policy statement to see which outlook is more probable. The consensus among economists is that there will be just one more hike after the coming meeting, reaching a terminal rate of 5.0%. However, the market is pricing in a terminal rate of 5.75%, which implies up to four rate hikes before the end of the year.

The difference in opinion seems to revolve around just how much more is needed to bring down inflation. BOE Governor Bailey already acknowledged that wage growth is causing an obstacle to getting prices under control, ahead of figures that showed basic pay in April rose at a record nominal rate of 7.2%. Tightness in the labour market is increasingly seen as the cause for inflation taking, as Bailey put it, "a lot longer than expected" to come down to target.

Inflation Coming Out Ahead of Meeting

Inflation has finally come off of the double digits, but that was in large part thanks to base effects in the prior months. The core rate has not made the case for bringing inflation to an end. But there is an expectation that over the course of the summer, inflation could moderate. UK CPI for May is expected to show the headline annual rate at 8.4%, down from 8.7% prior. The core rate is also expected to make a meagre decline to 6.6% compared to 6.8%. A significant move lower likely wouldn't change the outcome of the upcoming BOE meeting but might raise bets that the monetary policy statement could be more dovish. On the other hand, a rate above expectations would solidify the view that the terminal rate is still far off, which could be expressed in the BOE's communication. Also, this will be the last meeting for noted dove Silvana Tenreyro.

While the BOE is expected to keep hiking, the BOJ just recently confirmed that it would not. The yen is expected to remain weaker as long as officials don't take concrete measures to close the yield gap that has been growing between JGB and other countries debt. That gap could keep widening if inflation suggests more policy tightening in the UK, potentially pushing the GBPJPY to new highs.

GBPJPY Measured Move Points Higher

GBP/JPY has ended a running triangle pattern at 158.27, opening up a measured move projection high at 187.79. Above the 180.00 floor, between now and then, the price might come under pressure at round levels, with major resistance at 185.00. If 175.73 is lost, it will expose 172.13, which in turn might let the price succumb towards 168.73 but unlikely 158.27 unless the top is in.

Key Takeaways

GBP/JPY is at a 7 ½ year high ahead of an upcoming CPI release and BOE meeting. It is expected that the BOE will hike rates at this meeting, but there is disagreement about how many more hikes will follow. Economists predict one more hike, while the market is pricing in up to four hikes before the end of the year. Inflation has come off double digits, but base effects from previous months played a large role. The core rate has not made the case for bringing inflation to an end. On the other hand, the BOJ will not be hiking rates, leading to expectations that the yen will remain weak.