British Pound posts modest gains against Japanese Yen ahead of BoE decision

• With the Japanese Yen under pressure against most major currencies, GBP/JPY makes modest gains.
• Sterling finds support from expectations of a BoE rate rise and diminished concerns over UK fiscal policy.
• Neither hawkish BoJ signals nor intervention warnings provide much relief for the Yen.

Reduced fiscal uncertainty following the UK’s Autumn Budget is supporting the British Pound (GBP), with traders now looking ahead to this week’s Bank of England (BoE) monetary policy announcement. GBP/JPY posts modest gains on Monday as the Japanese Yen (JPY) remains weak, notwithstanding hawkish signals from the Bank of Japan (BoJ). Having briefly risen above 212, the cross is trading around 211.87 at the time of writing, a gain of 0.44% on the day.

Markets have fully priced in a 25-basis-point (bps) increase ahead of the BoE’s interest rate decision on Thursday, as surging energy costs push inflation higher. Policymakers also have scope to lift borrowing costs thanks to stable labour market conditions and resilient economic growth.

According to analysts at ING, the market’s conviction that “high energy prices leave the Bank of England no alternative but to hike rates on Thursday” is helping Sterling, which they describe as “trading reasonably well,”. In their view, “a 25bp rate hike to 4.00% looks like a done deal,” while “upside economic surprises, UK fiscal policy seemingly heading in the right direction and warmer ties with the EU,” are also underpinning sentiment towards the Pound.

In OCBC’s assessment, "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 failed to relieve the pressure: high energy prices are prompting other central banks to tighten policy too. With interest rates outside Japan still substantially higher, wide yield differentials persist.

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

Fresh warnings of intervention also did little to lift the Yen. On Monday, Japanese Finance Minister Satsuki Katayama repeated that the authorities stood ready to respond to disorderly currency movements, adding that Japan’s joint foreign exchange statement with the US was still in force.