Japanese Yen lags British Pound ahead of UK Budget and BoJ decision

• GBP/JPY trades with a positive bias as the Japanese Yen underperforms its major peers.
• The BoJ is expected to hold interest rates on Friday, with focus shifting to a possible December hike.
• The UK Autumn Budget on Wednesday takes focus ahead of the BoE's November monetary policy meeting.

GBP/JPY posts modest gains on Monday as the Japanese Yen (JPY) underperforms its major peers. However, price action remains largely range-bound as traders brace for key events this week, including the UK Budget and the Bank of Japan’s (BoJ) monetary policy announcement. At the time of writing, the cross trades around 210.18, up 0.19% on the day.

The BoJ announces its interest rate decision on Friday and is widely expected to maintain its policy rate at 1.25%. Japan’s latest inflation figures support the case for further tightening. September inflation excluding fresh food accelerated to 2.1% annually from 1.7%, while the measure excluding fresh food and energy rose to 2.4% from 1.9%.

BoJ Governor Kazuo Ueda’s remarks will be closely watched as markets increasingly expect a rate hike in December. Ueda recently said that “underlying inflation is near the 2% target.” He also warned that “if the policy rate isn’t adjusted properly, market concerns about inflation risks could raise long-term rates.”

However, support for the Japanese Yen (JPY) from further tightening expectations remains limited by Japan’s relatively low interest rates and concerns over its heavy debt burden. The BoJ’s gradual approach may do little to narrow the interest rate gap with other major economies, as energy-driven inflation risks linked to the Middle East conflict keep other central banks hawkish.

On the UK side, attention turns to Wednesday’s Budget, with traders watching how the government balances support for the economy with the need to maintain fiscal discipline. Any changes to taxes and spending could influence the British Pound (GBP) ahead of the Bank of England’s (BoE) November 5 policy decision, with traders fully pricing in a 25-basis-point rate hike.

Deutsche Bank economists Sanjay Raja and Maui Brennan note that, coming into the Autumn Budget, their “baseline assumption was that the Chancellor would tap into the fiscal rule flexibilities, using financial transactions via public financial institutions (the so-called PuFins), to boost investment spending via a two-stage approach: a GBP 8bn expansion in the coming Autumn Budget, followed by an equal increase in the Spending Review due next year.”

However, they point out that “headlines from the FT over the weekend… suggest that Chancellor Healey will do more in the Autumn Budget, adding around GBP 20bn in investment over the next five years,” implying a materially more aggressive deployment of PuFins than previously envisaged.