• GBP/JPY recovers from intraday lows despite the BoJ's hawkish rate hike.
• Markets weigh the BoJ's slower balance-sheet reduction plans and still-negative real interest rates.
• Traders await UK CPI, PPI and labor market data ahead of the BoE's monetary policy announcement on Thursday.

GBP/JPY rebounds after a short-lived pullback on Wednesday as traders digest the Bank of Japan's decision to raise interest rates. At the time of writing, the cross is trading around 215.10, recovering from an intraday low of 214.53.

The Japanese Yen (JPY) strengthened after the BoJ ended a three-meeting pause and raised its policy rate by 25 basis points (bps) to 1.00% from 0.75%, the highest level since 1995.

Deputy Governor Shinichi Uchida said the BoJ will "continue to raise the policy interest rate in response to developments in economic activity, prices and financial conditions."

Despite the hawkish messaging, the Yen has failed to gain traction. The muted reaction may reflect the BoJ's decision to moderate the pace of its balance-sheet reduction from April 2027 and the fact that real interest rates in Japan remain negative.

According to BBH, "the swaps curve price in 75% odds the BOJ hikes by a total of 50bps in the next twelve months. The bar for a more aggressive BOJ tightening path is high because almost all underlying CPI indicators eased further below 2% in April."

Geopolitical uncertainty is also keeping traders on the sidelines, as markets await the formal signing of the proposed US-Iran peace agreement.

Attention now turns to the Bank of England's (BoE) interest rate decision on Thursday, where policymakers are widely expected to leave the Bank Rate unchanged at 3.75% for a fourth consecutive meeting. Traders will closely watch the voting split and policy guidance for clues on the future path of interest rates.

Ahead of the decision, markets will first digest the UK's Consumer Price Index (CPI) and Producer Price Index (PPI) reports on Wednesday, followed by labor market data on Thursday.