This week our currency strategists focused on the U.K. CPI inflation update for March 2025 and its potential impact on the British pound.
Out of the four scenario/price outlook discussions this week, one discussion arguably saw both fundie & technical arguments triggered to become potential candidates for a trade & risk management overlay.
Watchlists are price outlook & strategy discussions supported by both fundamental & technical analysis, a crucial step towards creating a high quality discretionary trade idea before working on a risk & trade management plan.
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GBP/JPY: Tuesday – April 15, 2025
GBP/JPY: 1-Hour Forex Chart by TradingView
On Tuesday, our strategists had their sights set on the U.K. inflation data for March 2025 and its potential impact on the British pound.
Based on our Event Guide, expectations were for headline inflation to ease to 2.7% y/y from 2.8% in February, and core inflation to remain sticky at 3.5% y/y. With those expectations in mind, here’s what we were thinking:
The “Sterling Surge” Scenario:
If inflation came in hotter than expected, particularly showing stickiness in the core inflation rate or services prices, we anticipated this could prompt a shift in BOE rate cut expectations, potentially supporting GBP.
We focused on GBP/USD for potential long strategies if risk sentiment remained positive, especially given the pair’s recent consolidation at a resistance zone following its solid climb over the past week. If risk sentiment leaned negative, GBP/CAD long made sense given Canada’s recent underwhelming growth figures and the BOC’s relative dovishness.
The “Sterling Slump” Scenario:
If U.K. inflation data showed a significant undershoot of expectations, potentially signaling that inflation was moving back towards the 2% target faster than anticipated, we thought this could weigh on the pound.
In this case, we considered GBP/CAD short positions if global risk sentiment leaned in favor of a crude oil rebound or easing trade tensions that could give the correlated Loonie some relief, allowing the pair to bounce off its trend correction zone around 1.8400. If risk sentiment turned broadly negative, GBP/JPY shorts looked attractive given the pair’s potential rangebound action as it inches close to the resistance near the 189.00-190.00 area of interest.
What Actually Happened:
The Office for National Statistics reported that U.K. CPI inflation fell more than expected in March, with the annual rate dropping to 2.6% from 2.8% in February (versus 2.7% forecast). This marked the lowest inflation reading since December 2024. Core inflation (excluding food, energy, alcohol, and tobacco) eased slightly to 3.4% from 3.5%, showing modest progress in the stickier components.
Key points from the inflation report:
- Services inflation decreased notably to 4.7% from 5.0%, a particularly significant metric for the BOE
- Recreation and culture, motor fuels, and restaurants and hotels contributed to the slowdown
- Clothing and footwear prices rose, providing the largest offsetting upward effect
Monthly CPI rose by 0.3% in March 2025, down from 0.6% in March 2024
BOE policymakers had been cautious about the pace of easing in services inflation, and this release showed somewhat better progress than anticipated, improving the case for potential rate cuts at the May 8th meeting.
Market Reaction:
This outcome fundamentally triggered our “Sterling Slump” scenario, and with global risk sentiment leaning negative due to ongoing U.S.-China trade tensions, GBP/JPY became our focus.
Looking at the GBP/JPY chart, we can see the pair was already hovering around the 189.00 handle with a slight bearish bias before the actual inflation data hit the wires. Sterling had a muted initial reaction to the numbers as some profit-taking took place,
The downward momentum picked up during the latter part of the European session and took the pair below the 188.00 mark, as traders likely adjusted BOE policy expectations while also reacting to broad risk-off moves on account of news of the U.S. government requiring Nvidia a license to export to the Chinese market and China demanding more respect from the U.S. in trade talks, leading to safe-haven flows for JPY.
In addition, comments from BOE policymaker Catherine Mann who acknowledged the “welcome progress” in inflation put further downside pressure on GBP. However, the selloff soon lost steam as the pair found some support at the 100 SMA dynamic inflection point and rebounded back to pre-CPI levels in the sessions that followed while choppy trading conditions ahead of the Easter holidays ensued.
By Friday, GBP/JPY had settled around 188.30, reflecting both the impact of the softer-than-expected U.K. inflation data and the broader market’s risk-off stance that supported the Japanese yen.
The Verdict:
So, how’d we do? Our original discussion correctly identified that a softer-than-expected CPI print would likely pressure the pound, and the technical setup for GBP/JPY shorts proved effective as the pair retreated from the resistance near 189.00.
This discussion was “neutral” in support of a net positive outcome as both fundamental and technical triggers aligned well, but the pair did not show the sustained bearish reaction we expected. Although weaker U.K. inflation data provided the fundamental catalyst for sterling weakness and broader risk-off sentiment supported the yen’s safe-haven appeal, GBP/JPY only had a short-lived reaction to the numbers and did not drop to the bearish targets being eyed.
For traders who entered short positions around the 189.00-189.50 top of the range after the inflation miss and faded the initial “buy the rumor, sell the news” reaction, the trade offered a short-term opportunity for roughly a 100-pip gain until the dip to the next psychological support around 188.00.
Depending on trade management (i.e. stop loss adjustments or scaling out of positions) a short GBP/JPY position could have still yielded a breakeven outcome or even a loss since the pair eventually went back to the resistance zone later on.
The key takeaway here is that, on top of aligning fundamental catalysts with technical setups and broader market themes, risk management and adjustments to open positions still plays a key role in determining the outcome of a trade.
In this case, although weak U.K. inflation data and trade tensions provided the triggers for a bounce off the resistance zone, being quick on your feet to book short-term profits or trail stops as momentum starts to fade would have likely been profitable decisions given the sideways behavior for the remainder of the week.
