GBP/JPY Continues to Rise Amid Economic Discussions

GBP/JPY is on the rise for the second consecutive day, trading at around 209.80 during Asian hours on Friday. The British Pound (GBP) has held its strength after Bank of England (BoE) Governor Andrew Bailey shared his ongoing concerns about inflation in the UK during a moderated talk at the Institute of International Finance Annual Membership Meeting in Bangkok, Thailand.

During his address, Bailey pointed out that although the UK economy is showing more resilience than what was previously thought, the growth is still not enough to meet the country’s demands. He mentioned that it is premature to make solid conclusions about the second-round effects of inflation; yet, early indications seem muted, as businesses are focusing more on cutting costs rather than increasing prices.

The British Pound gained traction following the release of unexpectedly strong UK economic data on Thursday. Official reports indicated that the UK’s economy grew by 0.1% month-over-month in August, bouncing back from a 0.4% increase in July. This uptick surpassed market predictions, which had estimated a 0.1% decline.

Encouraging UK Data Fuels November BoE Rate Hike Speculation

Kenneth Broux from Societe Generale emphasized that the better-than-expected UK GDP reinforces the case for a rate hike by the BoE in November. He noted that dip buyers have quickly stepped in to support GBP/USD amid softer US yields, keeping the exchange rate steady around the 1.32 mark as the markets grow more optimistic about a tightening from the BoE later this year.

That said, there might be limits to further gains in the GBP/JPY pair as the Japanese Yen benefits from hawkish indicators coming from the Bank of Japan (BoJ). BoJ board member Junko Koeda remarked on Thursday that the central bank should not be overly cautious about raising interest rates, hinting at a possible near-term increase in borrowing costs. She stressed the need for timely adjustments to the policy rate while considering the estimated neutral interest rate range.

Koeda’s comments, rated 8.2/10 on FXS Speechtracker, align with her historical average, suggesting a consistent yet clearly hawkish perspective compared to the recent BoJ stance. By emphasizing an accommodating monetary environment, potential price risks, and a neutral rate “significantly above 1%,” there seems to be room for further policy normalization without a fixed rate hike schedule.

The commitment to adjusting policies so that underlying inflation does not surpass 2%, along with the indication that the September rate hike was in response to resilient economic data, supports a cautious yet tightening outlook. For the currency markets, the combination of a higher perceived neutral rate and a thorough assessment of financial conditions is favorable for the Yen, as the possibility for gradual rate increases remains if inflation hovers around 2% and economic growth stays strong.