Can the British Pound hold modest gains against the Japanese Yen with the BoE decision in focus?

• Weakness in the Japanese Yen against most major peers helps GBP/JPY inch upwards.
• The Pound finds support as UK fiscal worries recede and markets anticipate a BoE rate increase.
• Neither hawkish BoJ signals nor intervention warnings provide much relief for the Yen.

A struggling Japanese Yen (JPY) helps GBP/JPY move modestly higher on Monday, with hawkish signals from the Bank of Japan (BoJ) failing to lift the currency. The British Pound (GBP), meanwhile, benefits from easing fiscal uncertainty after the UK’s Autumn Budget, with traders now focusing on this week’s Bank of England (BoE) monetary policy announcement. Having briefly moved above 212, the cross is trading near 211.87 at the time of writing, a gain of 0.44% for the day.

Markets have fully factored in a 25-basis-point (bps) rate increase ahead of the BoE’s decision on Thursday, as surging energy costs add to inflation. Policymakers also have scope to increase borrowing costs thanks to stable labour market conditions and growth that has held up.

In ING analysts’ assessment, Sterling is “trading reasonably well,” with support coming from the market’s belief that “high energy prices leave the Bank of England no alternative but to hike rates on Thursday.” In their view, “a 25bp rate hike to 4.00% looks like a done deal,” while the Pound’s sentiment backdrop also benefits from “upside economic surprises, UK fiscal policy seemingly heading in the right direction and warmer ties with the EU,” factors that provide further support for Sterling.

Pointing to the currency’s outlook, OCBC argues that "GBP resilience should extend into early 2027 as fiscal discipline, resilient growth and political stability remain supportive." The bank nevertheless cautions that "with substantial BoE tightening already priced in, further gains will require increasingly positive UK surprises."

For the Japanese Yen (JPY), the BoJ’s hawkish position has not prevented continued pressure. High energy prices are encouraging other central banks to tighten policy as well. With interest rates outside Japan still considerably higher, yield differentials remain wide.

Friday’s widely anticipated BoJ decision left interest rates at 1.25%, although the bank indicated that further increases would follow if economic activity and prices develop in accordance with its forecasts. The full quarterly outlook report, published on Monday, said underlying inflation had climbed towards 2% and was gradually becoming anchored at that level. Further rate rises would likely help moderate price pressures and underpin consumption, the BoJ added.

Fresh intervention warnings have also done little to support the Yen. On Monday, Japanese Finance Minister Satsuki Katayama again said the authorities stood ready to respond to disorderly currency movements, adding that Japan’s joint foreign exchange statement with the US was still in effect.