GBP/JPY Eases Ahead of BoE and BoJ Policy Decisions

Key Moments

GBP/JPY trades around 217.84, down 0.23% as broad-based Pound weakness emerges.
Markets anticipate the BoE will hold its benchmark rate at 3.75% while the BoJ is expected to maintain its policy rate at 1%.
Oil’s pullback and a temporary pause in US-Iran tensions have eased inflation worries, weighing on UK yields and the Pound.

GBP/JPY Under Pressure Ahead of Central Bank Meetings

GBP/JPY moves lower on Monday as the British Pound (GBP) retreats across major currencies after its recent gains, with market participants scaling back positions before the Bank of England’s (BoE) rate decision on Thursday. At the time of writing, the cross is trading near 217.84, down 0.23% on the session.

Position trimming in sterling ahead of the BoE meeting combines with broad Pound softness to drag the pair down, even as demand for the Japanese Yen (JPY) remains subdued.

Oil, Yields, and Inflation Expectations Pressure Sterling

The Pound also comes under pressure from declining UK government bond yields after Oil prices started the week sharply lower. A temporary halt in attacks between the United States (US) and Iran has dampened near-term inflation concerns, undermining expectations that the BoE will need to pursue more aggressive tightening.

The BoE is broadly expected to keep its benchmark rate steady at 3.75%. The latest energy shock has so far had a limited effect on UK inflation, with the Consumer Price Index (CPI) easing to a 15-month low of 2.6% in June.

However, risks to the inflation outlook persist. The recent drop in Oil prices may not last in the absence of concrete negotiations between Washington and Tehran, while energy flows through the Strait of Hormuz remain significantly disrupted.

Market Pricing and Analyst Views on BoE Path

ING analyst Francesco Pesole said, “If inflation is still expected to remain contained, we believe the BoE will leave rates unchanged for the rest of the year.”

“With markets pricing 38 [bps] of tightening by year-end, dovish repricing remains, in our view, the clearest near-term risk for sterling,” Pesole added.

Fiscal Concerns Add Another Headwind for the Pound

Sentiment toward the Pound is further dampened by worries about the UK’s fiscal trajectory. Prime Minister Andy Burnham has flagged plans to increase spending on defense, social care and housing, prompting investors to question whether these initiatives will be financed through higher borrowing or tax hikes.

Yen Weakness Limits Downside in GBP/JPY

Despite the pressure on sterling, the downside in GBP/JPY remains contained as the Japanese Yen (JPY) continues to trade on a structurally weak footing. Japan’s low interest rate environment and dependence on imported energy weigh on the currency, even with Oil prices pulling back on Monday.

The Bank of Japan (BoJ) will announce its interest rate decision on Friday and is widely expected to keep its policy rate unchanged at 1%.

Pound Sterling Performance Against Major Currencies

The table below summarizes today’s percentage changes of the British Pound (GBP) versus major currencies. According to the data, the Pound has shown the strongest performance against the Canadian Dollar.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		-0.11%	0.13%	-0.11%	0.10%	-0.21%	0.01%	-0.33%
EUR	0.11%		0.20%	0.00%	0.22%	-0.11%	0.14%	-0.24%
GBP	-0.13%	-0.20%		-0.20%	-0.01%	-0.30%	-0.10%	-0.44%
JPY	0.11%	0.00%	0.20%		0.17%	-0.11%	0.10%	-0.22%
CAD	-0.10%	-0.22%	0.01%	-0.17%		-0.29%	-0.07%	-0.41%
AUD	0.21%	0.11%	0.30%	0.11%	0.29%		0.24%	-0.14%
NZD	-0.01%	-0.14%	0.10%	-0.10%	0.07%	-0.24%		-0.37%
CHF	0.33%	0.24%	0.44%	0.22%	0.41%	0.14%	0.37%

The heat map shows percentage moves of major currencies relative to each other. The base currency is taken from the left-hand column, and the quote currency from the top row. For instance, choosing the British Pound from the left column and moving horizontally to the US Dollar cell gives the percentage change for GBP (base)/USD (quote).