GBP/JPY falls from 167.00 as risk aversion diminishes and UK inflation buzzes

The GBP/JPY pair has declined modestly to about 166.70 after encountering resistance near 167.00 during the Tokyo session. A reduction in the risk-taking drive has weighed on the pound bulls as the S&P500 has retraced some of its gains following a stronger bounce.

In the past week, the cross has remained in the hands of bulls despite speculations that the Bank of Japan (BOJ) will intervene in the currency markets to protect the yen from volatility. As reported by Reuters, Japan's officials have begun their search for Haruhiko Kuroda's successor for next year. Regarding monetary policy guidelines, BOJ Kuroda noted, "Continuing monetary easing is appropriate." This has further undermined the yen bulls.

A political drama in the United Kingdom may cause extreme volatility for the pound bulls. The abrupt resignation of Chancellor Kwasi Kwarteng after he offered to rescind the plan to increase business taxes to 25 percent has generated political instability. The decision by the then-finance minister of the United Kingdom, Kwarteng, hastened returns on government bonds and the equity market's decline.

In the meantime, Bank of England (BOE) Governor Andrew Bailey's comments on monetary policy have increased the likelihood of additional BOE-BOJ policy divergence expansion. According to Reuters, BOE Bailey added, "We will not hesitate to hike interest rates in order to fulfill our inflation target." According to the central bank, price pressures necessitate more stringent policy tightening measures than were indicated in August.

The UK Consumer Price Index (CPI) statistics will be of paramount importance this week. The headline and core inflation rates could each increase by 10 basis points to 10% and 6.4%, respectively. A return to double-digit inflation could create additional obstacles for the British economy.