British Pound loses ground against Japanese Yen ahead of central bank decisions

GBP/JPY edges lower on Monday as the British Pound (GBP) weakens across the board following its recent advance, with traders trimming exposure ahead of the Bank of England’s (BoE) interest-rate decision on Thursday. At the time of writing, the cross trades around 217.84, down 0.23% on the day.

Sterling also faces pressure from lower UK government bond yields after Oil prices opened the week sharply lower. The temporary pause in attacks between the United States (US) and Iran has eased near-term inflation concerns, reducing expectations that the BoE will need to tighten policy aggressively.

The BoE is widely expected to leave its benchmark interest rate unchanged at 3.75%. The impact of the recent energy shock has so far been relatively contained in UK inflation data, with the Consumer Price Index (CPI) falling to a 15-month low of 2.6% in June.

However, upside risks to inflation have not disappeared. The decline in Oil prices could prove short-lived in the absence of concrete negotiations between Washington and Tehran, while energy supplies through the Strait of Hormuz remain heavily disrupted.

ING analyst Francesco Pesole said, “If inflation is still expected to remain contained, we believe the BoE will leave rates unchanged for the rest of the year.” “With markets pricing 38bp of tightening by year-end, dovish repricing remains, in our view, the clearest near-term risk for sterling,” Pesole added.

Concerns over the UK’s fiscal outlook also weigh on the Pound. Prime Minister Andy Burnham has signalled plans for higher spending on defence, social care and housing, leaving investors questioning whether the measures will require additional borrowing or tax increases.

However, the downside in GBP/JPY remains limited as the Japanese Yen (JPY) stays structurally weak. Japan’s low interest rates and reliance on imported energy continue to weigh on the currency, with Oil prices still elevated despite Monday’s decline.

The Bank of Japan (BoJ) also announces its interest-rate decision on Friday and is widely expected to keep its policy rate unchanged at 1%.