The GBP/JPY cross dipped to around 188.70 on Monday during early European trading, as the Japanese Yen (JPY) strengthened on the back of hawkish sentiment surrounding the Bank of Japan (BoJ) and stronger-than-expected second-quarter GDP data from Japan.
Investor optimism is growing that Japan’s robust GDP report for Q2 will prompt the BoJ to consider further interest rate hikes, which has broadly boosted the JPY and put downward pressure on the GBP/JPY cross. Japan’s economy expanded by 0.8% quarter-on-quarter in Q2, surpassing market expectations of a 0.5% increase.
Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, commented on the situation, stating, “The reports are positive overall and support the BoJ’s view, which bodes well for further rate hikes. However, the central bank would likely proceed with caution, as the last rate increase caused a sharp spike in the Yen.”
Adding to the sentiment, Japanese Economy Minister Yoshitaka Shindo noted last week that the economy is expected to recover gradually as wages and income improve. He also mentioned that the government would continue to collaborate closely with the BoJ to implement flexible monetary policies moving forward.
Conversely, the British Pound (GBP) found some support from encouraging UK Retail Sales data released last Friday, which tempered expectations of a second consecutive interest rate cut by the Bank of England (BoE). However, UBS analysts still anticipate another rate cut in November, with more to follow in 2025. “We expect another 25 bps cut in November with more to come in 2025,” UBS analysts stated.
Looking ahead, traders are likely to focus on the upcoming preliminary UK S&P Global/CIPS Manufacturing Purchasing Managers Index (PMI) for August and Japan’s National CPI for July, both of which are due later this week on Thursday and Friday, respectively, for further market direction.
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