British Pound shows limited reaction to expected increase in UK headline inflation

• The British Pound moves mildly against the Japanese Yen after the UK CPI data for July.
• The UK headline CPI growth remains higher at 2.9% YoY, as expected, while the core CPI remains steady at 2.6% YoY.
• Hawkish BoJ bets help Japanese Yen stage a strong recovery.

The British Pound (GBP) reflects a slight market action against the Japanese Yen (JPY) near its day’s low at around 215.70 after the release of the United Kingdom (UK) Consumer Price Index (CPI) data for July.

The Office for National Statistics (ONS) has reported that the headline inflation accelerated to 2.9% Year-on-Year (YoY), as expected, from 2.5% in June. The core CPI – which excludes volatile components of food, energy, alcohol and tobacco – grew at a steady pace of 2.6% YoY, while it was expected to slow down to 2.5%.

On a monthly basis, the headline CPI data arrives at 0.35, as expected, higher than the previous reading of 0.1%.

Signs of headline price pressures re-accelerating after slowing down in June indicate that UK inflation concerns remain intact, a scenario that could force traders to reassess Bank of England (BoE) interest rate expectations. Currently, financial markets expect the BoE to hold policy rates at their current levels the entire year.

UK wages seen easing as TD Securities expects BoE to stay on hold

According to TD Securities, the UK labour market is set to “continue along the steady but lacklustre path seen since the start of the year,” with June delivering a “100k change in employment on a 3m/3m basis (mkt: 120k; prior: 148k).” On the wage side, the bank expects “a fair drop in the headline average weekly earnings growth measure to 4.0% 3m/y (mkt: 4.0%) from 4.3% in May, as March’s outsized bonus figures fall out of scope and reverse the upward pressures seen in the past three months.”

TD Securities anticipates that “ex-bonus wage growth should remain at 3.4% 3m/y (mkt: 3.4%) while private earnings ex-bonus growth is set to dip to 2.7% 3m/y (mkt: 2.8%; prior: 2.9%).” The bank notes that “the latter two measures sit within reach of levels consistent with the BoE’s inflation target,” a development that is “likely reassuring the majority of the MPC that labour market dynamics are limiting second-round inflation pressures and supporting a majority vote to keep Bank Rate on hold.”

Meanwhile, the Japanese Yen (JPY) outperforms its major currency peers on Wednesday after two weeks of underperformance, as financial markets are confident that the Bank of Japan (BoJ) will raise interest rates by 25 basis points (bps) to 1.25% in the September policy meeting.

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