British Pound weakens against Japanese Yen as BoE policy decision approaches

• GBP/JPY slips towards 212.93, with the British Pound under modest selling pressure before the BoE policy decision.
• A 25 bps interest rate rise to 4% is widely expected from the BoE.
• The BoE’s guidance on the interest rate outlook is likely to draw greater attention from investors.

A 0.16% decline leaves the British Pound (GBP) trading near 212.93 against the Japanese Yen (JPY) in Thursday’s European session. Caution ahead of the Bank of England’s (BoE) monetary policy announcement at 12:00 GMT is weighing on Sterling and keeping the cross under pressure.

Firmer UK data supports expectations of modest BoE hike to begin tightening cycle

Ahead of Thursday’s BoE decision and the accompanying Monetary Policy Report, Brown Brothers Harriman (BBH) strategists say the central bank is “widely expected to start tightening with a 25bps hike to 4.00% after standing pat all year.” In support of that expectation, they note that “firmer UK inflation and economic activity back the move,” with the vote split “seen at 7-2 with doves Alan Taylor and Swati Dhingra supporting a hold,” highlighting that some policymakers remain unconvinced that a new tightening phase should begin.

Given financial markets’ apparent confidence that the BoE will begin a monetary tightening cycle, investors are likely to place greater emphasis on its comments about the outlook for interest rates.

Pound faces downside risk if BoE signals a slower rate path

The tone of the BoE’s forthcoming communication may challenge Sterling’s recent resilience, according to analysts at Societe Generale. In their assessment, “if the BoE’s guidance on Thursday shows any hesitation about how much further they need to go, the pound could start looking vulnerable,” although they believe “it is probably too early for them to give the appearance of slowing down.”

In Japan, the focus is on fresh indications of the extent to which the Bank of Japan (BoJ) will raise interest rates during its current monetary tightening cycle.

Friday brings September’s Labour Cash Earnings release, a key gauge of wage growth that investors will be watching. Annual growth is expected to hold at 3.8% year-on-year (YoY).