GBP/JPY holds near five-week highs amid Yen softness, UK CPI in focus

• GBP/JPY holds near five-week highs as the Yen stays soft on Japan’s fiscal stimulus push and cautious BOJ stance.
• UK sentiment remains cautious ahead of the November 26 Budget.
• All eyes on UK CPI report due on Wednesday, with softer inflation likely to reinforce BoE rate cut expectations.

The British Pound strengthens against the Japanese Yen on Tuesday as the Yen remains under pressure amid Japan’s expansionary fiscal plans and the Bank of Japan’s (BoJ) cautious approach to policy tightening. At the time of writing, GBP/JPY is trading around 204.25, hovering close to the more-than-five-week high reached on Monday.

However, sentiment around the Pound remains fragile as markets brace for the November 26 UK Budget, with uncertainty over the government’s tax and spending plans. Recent reports suggest the Treasury is exploring alternative revenue options after dropping a proposed income-tax increase, including the possibility of a new property-related levy.

At the same time, growing bets on a December Bank of England (BoE) rate cut are weighing on Sterling. Investors are reacting to signs of cooling momentum in the UK economy, including softer wage growth and a rise in unemployment, while inflation appears to have passed its peak. 

Attention now turns to  October's Consumer Price Index (CPI) report due on Wednesday, with headline inflation expected to ease to 3.6% YoY from 3.8% and core inflation seen edging down to 3.4% from 3.5%.

Adding to the cautious mood, BoE Chief Economist Huw Pill struck a balanced but slightly dovish tone on Tuesday, saying policymakers are now navigating “a series of quite finely balanced decisions.” Speaking at a Natixis event, Pill noted that underlying inflation pressures in the UK are “probably not as strong as the headline figures suggest.” 

He cautioned against over-interpreting the latest data, highlighting unusual noise in several key indicators, but added that if evidence of persistent economic slack becomes clearer, he would feel “compelled to act.”

In Japan, expansionary fiscal plans and the BoJ’s gradual approach to policy adjustments continue to weigh on the Yen.

Earlier in the day, a meeting between BOJ Governor Kazuo Ueda and Prime Minister Sanae Takaichi also failed to offer any support to the Yen. Ueda told the Prime Minister that the BOJ is “in the process of making gradual adjustments to the degree of monetary easing,” adding that the Bank aims to deliver a “smooth, stable landing” toward its 2% inflation target. He later confirmed that Takaichi made no specific request regarding monetary policy.

Japan’s Finance Minister Satsuki Katayama voiced concern over the Yen’s moves through verbal intervention, saying the government is “alarmed” by the currency’s recent moves and will closely monitor markets for excessive or disorderly behaviour.