GBP/JPY retreats below 200.00 despite BoJ postponing taper tantrum plans

■GBP/JPY surrenders BoJ-led gains and drops below 200.00.

■The BoJ left interest rates steady and postponed taper tantrum plans.

■Steady UK wage growth remains a key barrier to BoE’s move towards policy-normalization.

The GBP/JPY pair falls back below the psychological support of 200.00 to 199.50 in Friday’s European session after posting a fresh multi-year high of 201.62. The cross weakens even though the Bank of Japan (BoJ) kept overnight rates in the range of 0%-0.1%. The BoJ was already expected to keep interest rates unchanged, however, the postponement of decision on tapering bond-buying to the July meeting was unexpected.

At the conclusion of the policy meeting, BoJ Ueda said the bank would continue buying government bonds. However, earlier this month, BoJ Governor Kazuo Ueda emphasized on reducing bond purchases in a manner to move forward towards their agenda of exiting expansionary policy stance.

This has raised concerns over scope of BoJ’s policy-normalization. Investors are already concerned over the same as price pressures in the Japanese economy are majorly driven by competitive exports due to weak Yen and not from the wage-growth spiral.

In the United Kingdom (UK), uncertainty over Bank of England (BoE) rate cuts has deepened due to steady wage growth that fuels service inflation, and poor economic health and labor demand.

The UK economic recovery appears to have stalled as monthly Gross Domestic Product (GDP) remained stagnant in April. Also, the labor market is facing lay-offs consistently from past four times. This indicates that the economy is struggling to bear the consequences of higher interest rates by the BoE. Currently, financial markets are split between August or September meeting about when the BoE will start reducing interest rates.