Pound-Yen Exchange Rate Hit as BoJ Hike Expectations Rise

The British pound-Japanese yen (GBP/JPY) exchange rate has come under pressure due to expectations of another Bank of Japan (BoJ) rate hike, which has strengthened demand for the yen.

The Japanese currency has reached its strongest level against the US dollar in around six months, while the pound faces a less certain interest-rate outlook as Bank of England (BoE) policymakers remain divided over whether inflation requires further tightening.

Japan's latest economic data have added weight to expectations of higher rates. Revised figures released on Tuesday showed the economy expanded at an annualised 1.4% in the second quarter, up from an initial estimate of 1.1%. The stronger reading comes as markets increasingly expect the BoJ to raise its policy rate by 0.25 percentage points at its September meeting, with current pricing putting the probability at around 80%.

The yen is also benefiting from expectations that Japanese authorities remain prepared to respond to disorderly currency moves. Japan and the US intervened to support the yen earlier this year, and recent comments from officials have kept the possibility of further action in focus. Combined with expectations of higher Japanese interest rates, this has helped unwind some of the pressure that kept the yen weak for much of the year.