British Pound extends intraday gains above 209.50 as fiscal woes weigh on Yen

• GBP/JPY regains positive traction amid a combination of supporting factors.
• Japan’s fiscal woes weigh on the JPY, while BoE hike bets underpin the GBP.
• Looming intervention risks could limit deeper JPY losses and cap spot prices.

The GBP/JPY cross extends its recovery move from the weekly low, around the 208.20-208.15 region touched the previous day, and gains strong follow-through traction on Friday. The momentum remains unabated through the early part of the European session, lifting spot prices further beyond the mid-209.00s in the last hour.

The Japanese Yen (JPY) continues with its relative underperformance amid concerns about Prime Minister Sanae Takaichi's expansionary fiscal policies and massive public debt. Furthermore, data released earlier today showed that Japan’s Household Spending fell for a ninth successive month in August, which further undermines the JPY. The British Pound (GBP), on the other hand, benefits from firming expectations for a rate hike by the Bank of England (BoE) in November and a softer US Dollar (USD). This, in turn, provides a goodish lift to the GBP/JPY cross.

BoE seen hiking again as UK growth outlook improves

Analysts at Commerzbank argue that the brighter UK growth backdrop is shifting the policy calculus at the BoE. In their view, “the improved growth outlook should make it easier for the Bank of England to raise rates further in order to lean against inflation.” They note that “until now, we had not expected the BoE to hike rates again,” but stress that “recent developments, however, have led us to conclude that a November rate hike is now more likely than not.” Commerzbank adds that this is unlikely to be “a one-off move,” and now “anticipate another hike in February, taking Bank Rate to 4.25%.”

Meanwhile, BoE Governor Andrew Bailey has noted that the broader economic outlook remains too uncertain to firmly commit to an aggressive multi-hike cycle. In contrast, BoJ Governor Kazuo Ueda stated that the policy phase has shifted toward preemptively fighting inflation risks rather than just trying to hit the 2% target. Moreover, an increase in Japan’s real wages for the eighth straight month reaffirmed bets for further BoJ policy tightening. This, along with looming intervention risks, could limit deeper JPY losses and cap the upside for the GBP/JPY cross.

In fact, traders remain on high alert amid speculation that Japanese authorities will step in again to prop up the domestic currency. Furthermore, the recent range-bound price action warrants some caution before placing aggressive bullish bets on the GBP/JPY cross and positioning for an extension of the recent recovery move from sub-207.00 levels, or the year-to-date (YTD) low, touched on September 30.