GBP/JPY extended its recovery on Tuesday, attracting fresh buying interest during the Asian session and edging closer to the mid-202.00s. Despite the uptick, the pair remains range-bound within levels seen over the past week, suggesting caution among traders before committing to a sustained move higher from last Friday’s low near 200.65.
The Japanese Yen (JPY) came under renewed pressure after lawmakers in Japan’s Lower House voted for Sanae Takaichi to become the country’s first female Prime Minister. Market participants anticipate that Takaichi could pursue a more expansionary fiscal agenda, which might allow the Bank of Japan (BoJ) to maintain its accommodative stance for longer. This expectation has weakened the Yen, providing a tailwind for the GBP/JPY cross.
However, political uncertainty persists. Takaichi’s fragile coalition will still need support from opposition parties to pass key legislation, as it currently lacks the 233 seats required for a simple majority. Meanwhile, markets remain convinced that the BoJ will continue with its gradual policy normalization, given that inflation has stayed at or above the central bank’s 2% target for over three years. Japan’s economy has also posted growth for five consecutive quarters through June, reinforcing the view that the BoJ could stay cautiously hawkish in the medium term.
Diverging policy outlooks limit GBP upside
While expectations of policy divergence between the BoJ and the Bank of England (BoE) continue to shape the pair’s outlook, upside momentum for the British Pound (GBP) may remain limited. Traders remain wary amid concerns over the UK’s fiscal trajectory ahead of the Autumn Budget announcement in November.
Additionally, with markets pricing in a gradual pace of rate cuts from the BoE amid persistent inflationary pressures, investors may hesitate to place aggressive bullish bets on the Pound. This combination of factors could keep the GBP/JPY pair capped despite near-term upward momentum.
