The GBP/JPY currency pair edged lower during the Asian session on Wednesday, retreating from a three-month peak around the 199.70 region and eroding some gains from the previous day. However, the spot prices have managed to hold above the 199.00 mark, showing a lack of follow-through selling as traders await the UK Autumn Budget for meaningful direction.
This upcoming budget announcement will be the first under the newly elected Labour government, led by Chancellor of the Exchequer Rachel Reeves. Analysts expect Reeves to implement tax increases and boost public spending, as indicated by Prime Minister Keir Starmer. Traders will closely monitor the government’s overall spending plans, as these will significantly impact the Bank of England‘s (BoE) interest rate trajectory, thereby influencing the British Pound (GBP) and the GBP/JPY cross.
In the backdrop, expectations of potential BoE rate cuts in November and December, fueled by a decline in the UK Consumer Price Index to its lowest level since April 2021—falling below the central bank‘s 2% target—pose a headwind for the GBP. Conversely, the Japanese Yen (JPY) finds some support amid concerns that authorities may intervene to stabilize the domestic currency. This adds further pressure on the GBP/JPY cross.
Moreover, the loss of a parliamentary majority by Japan’s ruling coalition raises questions about the Bank of Japan‘s (BoJ) ability to tighten its monetary policy. However, in a prevailing risk-on environment, this uncertainty could prevent a significant appreciation of the JPY, thereby limiting the downside for the GBP/JPY pair. As such, any further decline may be viewed as a potential buying opportunity, prompting caution before concluding that the spot prices have reached their peak.
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