GBP/JPY nears year-to-date highs as Japan’s fiscal plans weigh on the Yen

• Sterling gains against the Yen, with GBP/JPY nearing year-to-date highs around 205.33.
• Markets brace for a large fiscal package in Japan, pushing JGB yields to fresh 17-year highs.
• UK CPI cools in line with forecasts, bolstering expectations of a December rate cut by the Bank of England.

GBP/JPY advances for a third consecutive day on Wednesday, with the British Pound finding support from persistent weakness in the Japanese Yen, offsetting the softer-than-expected UK inflation data. At the time of writing, the cross is trading around 204.85, just shy of the year-to-date high of 205.33 reached on October 8.

The Japanese Yen remains under heavy pressure as investors brace for a sizeable fiscal stimulus package under Prime Minister Sanae Takaichi. On Tuesday, a ruling party panel proposed a supplementary budget exceeding ¥25 trillion to fund the new stimulus program, a sharp increase from last year’s ¥13.9 trillion extra budget.

The prospect of significantly higher government borrowing pushed Japan’s 10-year government bond yield above 1.77 percent on Wednesday, marking a fresh 17-year high and adding further pressure on the Yen amid rising fiscal concerns.

The sizeable fiscal package set to be unveiled later this week is reinforcing expectations that the Bank of Japan will stay on hold, dampening any hopes of a near-term rate hike. Goushi Kataoka, a member of Takaichi’s economic growth strategy panel, said in an interview on Tuesday that the central bank is not likely to raise its benchmark rate before March, as authorities will need to confirm that large-scale extra spending is boosting domestic demand.

In the United Kingdom, the latest inflation figures strengthened the case for an interest rate cut in December by the Bank of England (BoE), with traders also keeping an eye on the upcoming November 26 budget, which could reinforce easing expectations.

Headline Consumer Price Index (CPI) rose 0.4% MoM in October, matching expectations after a flat reading in September. On an annual basis, inflation eased to 3.6%, in line with the 3.6% forecast and down from 3.8% in September. Core CPI also moderated to 3.4% YoY, meeting expectations and edging lower from 3.5% in September.

According to the latest BHH report, the swaps market raised the probability of a December rate cut to 88%, up from 80% a day earlier. Over the next twelve months, the swaps curve now implies around 60 basis points (bps) of easing, with the policy rate expected to bottom between 3.25%-3.50%.