Pound-Yen faces fresh pressure as Japan prepares for higher rates

The British pound-Japanese yen (GBP/JPY) pair has come under pressure as expectations for another Bank of Japan (BoJ) rate hike strengthen demand for the yen. The Japanese currency has climbed to 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.

The UK picture is less straightforward. The BoE continues to hold Bank Rate at 3.75%, with inflation currently at 2.9%, above its 2% target. Higher and volatile energy prices remain an important concern, but policymakers must also consider the impact of tighter monetary policy on economic growth. This leaves the pound sensitive to any data that changes expectations around the BoE's next move.

"The yen is finding stronger support as markets become more confident that higher interest rates are coming in Japan. The picture in the UK is less clear, with inflation still above target but the Bank of England divided over whether rates need to rise again. That contrast is putting more attention on upcoming economic data and what both central banks say about their next steps," says Li Xing Gan, Financial Markets Strategist at Exness.

For traders, UK GDP on 11 September will provide the next important look at the strength of the British economy, followed by the BoE decision on 17 September and the BoJ meeting the following day. With both central banks facing important decisions, changes in rate expectations could keep GBP/JPY sensitive to incoming data and policy comments over the coming sessions.