Japanese Yen weakness lifts British Pound as wide interest-rate gap bites

• GBP/JPY rebounds as broad-based Japanese Yen weakness drives the cross higher.
• The wide UK-Japan interest-rate gap keeps the British Pound favoured against the Yen.
• Traders stay alert to intervention risk as USD/JPY approaches the psychological 160 mark.

GBP/JPY rebounds on Thursday, supported mainly by broad-based weakness in the Japanese Yen (JPY) rather than strength in the British Pound (GBP), as traders assess the monetary policy outlooks of the Bank of Japan (BoJ) and the Bank of England (BoE). At the time of writing, the cross trades around 210, recovering from an intraday low of 208.78.

While the BoJ is gradually raising borrowing costs, the inflationary impact of the Middle East war is keeping other central banks hawkish, keeping Japan’s interest-rate gap wide and weighing on the Yen.

The BoJ raised its policy rate by 25 basis points (bps) to 1.25% at its September meeting. However, traders viewed the decision as slightly dovish as two policymakers voted to keep borrowing costs unchanged. Elevated Oil prices also increase Japan’s import costs, while broader fiscal concerns create another drag on the Yen. Traders will keep a close eye on the risk of intervention by Japanese authorities as USD/JPY climbs back toward the psychological 160.00 mark.

The BoE has stayed on hold so far this year, leaving its benchmark rate unchanged at 3.75% for a sixth straight meeting last week. Still, the 2.50% rate gap between the United Kingdom (UK) and Japan keeps the British Pound favoured against the Yen. Traders also keep the possibility of a BoE rate hike on the table as inflation risks stay tilted to the upside.

Comments from BoE officials on Thursday highlighted differing views within the central bank. Swati Dhingra said, “Financial conditions have done a lot of tightening work already in the UK,” adding, “We are not seeing broad-based price rises like those that happened in 2022.” She also noted that “winter energy prices will be critical for second-round effects.”

Deputy Governor Clare Lombardelli offered a more hawkish view, saying, “Wage growth remains too high to be consistent with inflation target.” She added, “Policy is increasingly likely to need to tighten if elevated energy prices persist, absent clear evidence of disinflation or weaker activity,” and warned that the “case for a hike grows the longer the conflict persists.”

For now, the wide interest-rate gap keeps GBP/JPY supported, but with USD/JPY grinding back toward 160, traders will stay alert to the risk of intervention by Japanese authorities.