• GBP/JPY scales higher for the second consecutive day as the JPY continues to underperform.
• The so-called carry trade counters intervention risks and continues to weigh heavily on the JPY.
• Burnham's commitment to stick to fiscal rules supports the GBP and contributes to the move up.

The GBP/JPY cross gains strong follow-through positive traction for the second successive day and rallies to mid-216.00s during the early European session on Monday, back closer to a multi-year peak set in late April.

Despite the recent Bank of Japan (BoJ) rate hike to 1%, or the highest since 1995, borrowing costs in Japan remain significantly lower compared to other Western economies, including the UK. In fact,  the Bank of England's (BoE) base rate is at 3.75%, leaving a gap of around 275 basis points (bps). This continues to fuel the so-called carry trade, which has been a key factor driving flows away from the Japanese Yen (JPY) .

Adding to this, Japan's expansive fiscal policies contribute to the JPY's historic underperformance and provide a strong boost to the GBP/JPY cross. In fact, Japan’s government gross debt-to-GDP ratio is the highest among advanced G7 economies. Adding to this, Japanese Prime Minister Sanae Takaichi's unprecedented ¥370 trillion public-private investment plan spanning over 14 years sparked severe fiscal worries.

Further, Japan’s heavy reliance on imported energy turns out to be another factor that has been pressuring the JPY amid tensions over the Strait of Hormuz. Iran’s ambassador to China said on Saturday that Tehran plans to introduce new service fees for ships passing through the strategically important waterway. This adds to worries about the economic fallout due to the continued disruption of Oil supplies through the Strait.

The aforementioned fundamental backdrop counters expectations of a possible intervention by Japanese authorities and favors the JPY bears. In fact, Japan’s Finance Minister Satsuki Katayama said on Friday that officials are ready to act appropriately to currency fluctuations. Moreover, Japan's Chief Cabinet Secretary Minoru Kihara reiterated that the administration is closely monitoring FX moves and is ready to intervene when needed.

Meanwhile, a modest US Dollar (USD) uptick exerts some pressure on the British Pound (GBP). This, however, does little to hinder the GBP/JPY pair's strong intraday move higher. Furthermore, hopes that Andy Burnham – the frontrunner to succeed Keir Starmer as UK Prime Minister – will adhere to his commitment to strict borrowing rules favor the GBP bulls and suggest that the path of least resistance for spot prices is to the upside.