GBP Holds Above Weekly Low vs Bearish Yen Amid Interest Rate Gaps

The British Pound (GBP) has held above its weekly low against the Japanese Yen (JPY), but lacks follow-through buying. It trades around the mid-216.00s during the early European session on Thursday.

The JPY continues to struggle to attract buyers, amidst concerns about Japan's deteriorating fiscal position due to massive national debt and new spending plans. The interest rate gap between Japan and other major economies also undermines the JPY, supporting the GBP/JPY cross.

The Bank of Japan (BoJ) increased its short-term policy rate to 1.00% in June, while the Bank of England (BoE) has maintained its benchmark rate at 3.75%, leaving a sizeable difference of around 275 basis points (bps). This keeps the JPY carry trade and might continue to act as a tailwind for the GBP/JPY cross.

Strategists at Scotiabank highlight that the upcoming BoJ meeting is “currently priced for about 20bpts of tightening, offering some scope for additional near-term strength” in the JPY. However, they caution that guidance on the policy trajectory may prove more market-sensitive than the modest adjustment already anticipated.