GBP/JPY slips as weak UK PMI data weighs on Sterling

• GBP/JPY edges lower as weak UK PMI data pressures the Pound.
• UK business activity slows sharply, with Composite PMI hitting a six-month low.
• Japan inflation eases, but underlying price pressures remain firm, supporting the Yen.

GBP/JPY trades in a narrow range on Tuesday with a mild downside bias, as the British Pound (GBP) weakens following weaker-than-expected UK business activity data. At the time of writing, the cross is trading near 212.50, reversing earlier gains driven by Japan’s softer inflation data.

The latest UK S&P Global preliminary Purchasing Managers Index (PMI) data showed a notable slowdown in economic activity in March. The Composite PMI fell to 51.0 from 53.7, missing expectations of 52.8 and marking a six-month low.

The Services PMI dropped sharply to 51.2 from 53.9, well below the 53.0 forecast. The Manufacturing PMI edged down to 51.4 from 51.7, but slightly beat expectations of 51.1.

Commenting on the data, Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, said, “The war in the Middle East has hit the UK economy in March, stalling growth while driving inflation sharply higher.” Williamsom added, “The full impact on inflation and economic growth depends not just on the duration of the war but also the length of disruptions to energy markets and shipping, though March’s PMI numbers clearly underscore how downside growth risks and upside inflation risks have already materialised.”

The Bank of England (BoE) kept interest rates unchanged at 3.75% last week, with policymakers warning that the Middle East conflict is likely to push inflation higher through rising energy costs. The latest PMI figures add to this challenge, suggesting the BoE is likely to remain on hold for longer, with traders now fully pricing in two rate hikes by year-end, a sharp shift from earlier expectations of policy easing.

Adding to this, BoE Chief Economist Huw Pill said on Tuesday the Bank is ready to act “if necessary to contain the lasting components of any new inflationary pressures.”

On the Japanese side, the Yen finds some support despite softer headline inflation data. Japan’s National Consumer Price Index (CPI) rose 1.3% YoY in February, easing from 1.5% previously, while core inflation excluding fresh food slowed to 1.6% from 2.0%, slipping below the Bank of Japan’s (BoJ) 2% target.

The data could complicate the Bank of Japan’s (BoJ) normalization path after the central bank kept its policy rate unchanged at 0.75% last week. Policymakers reiterated that they will continue to raise rates if the economy and prices evolve in line with forecasts, adding that policy will be guided by the goal of achieving the 2% inflation target stably and sustainably.

Attention now turns to the BoJ's monetary policy meeting minutes and the UK’s Consumer Price Index (CPI) and Producer Price Index (PPI) data due on Wednesday.