British Pound weakens against Japanese Yen as BoE policy decision approaches

• Mild selling pressure on the British Pound ahead of the BoE policy decision drags GBP/JPY towards 212.93.
• A 25 bps increase to 4% is the widely expected outcome of the BoE’s interest rate decision.
• The BoE’s guidance on the future path of interest rates is likely to draw greater investor attention.

Caution ahead of the Bank of England’s (BoE) monetary policy announcement at 12:00 GMT is weighing on the British Pound (GBP). During Thursday’s European trading session, the currency is trading near 212.93 against the Japanese Yen (JPY), a decline of 0.16%, leaving the cross under pressure.

Will firmer UK data prompt the BoE to begin tightening with a modest hike?

Firmer UK data support the case for a rate increase, according to strategists at Brown Brothers Harriman (BBH), who draw attention to Thursday’s BoE decision and the accompanying Monetary Policy Report. The central bank is “widely expected to start tightening with a 25bps hike to 4.00% after standing pat all year.” As the strategists note, “firmer UK inflation and economic activity back the move,” although the vote split is “seen at 7-2 with doves Alan Taylor and Swati Dhingra supporting a hold,” indicating that some policymakers remain unconvinced about starting a fresh tightening phase.

With financial markets appearing confident that a monetary tightening cycle will begin, investors are likely to give greater weight to the BoE’s comments on the future course of interest rates.

Could hints of a slower BoE rate path leave the Pound vulnerable?

The tone of the BoE’s forthcoming communication could challenge the Pound’s recent resilience, analysts at Societe Generale warn. 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 also 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’s release of September Labor Cash Earnings, a key gauge of wage growth, will be the next focus for investors. The year-on-year (YoY) reading is expected to hold at 3.8%.