British Pound drifts lower vs Japanese Yen as bulls look to BoE and BoJ policy updates

GBP/JPY attracts fresh sellers as a pickup in USD demand is seen weighing on the GBP.
The wide UK-Japan rate gap keeps JPY bulls on the defensive and should support the cross.
Traders now look to the BoE rate decision for a fresh impetus ahead of the BoJ on Friday.

Haresh Menghani FXStreet

The GBP/JPY cross struggles to capitalize on the previous day's solid bounce from the 217.15 area, or a two-week low, and meets with some supply during the Asian session on Thursday. Spot prices currently trade above the 218.00 round figure, down less than 0.15% for the day, though the downside seems cushioned as traders await the crucial Bank of England (BoE) decision.

The central bank is expected to keep interest rates steady as domestic inflation pressures still look contained despite the volatile energy price backdrop. In fact, the headline UK Consumer Price Index (CPI) fell to a 15-month low of 2.6% in June. Nevertheless, inflation remains above the BoE's 2% target. Hence, traders will look for cues about the future policy path amid expectations for a quarter-point rate hike by November and another one by March 2027. The outlook, in turn, will play a key role in driving the British Pound (GBP) and providing some meaningful impetus to the GBP/JPY cross.

Heading into the key central bank event risk, a goodish pickup in the US Dollar (USD) demand exerts some pressure on the GBP. Moreover, traders remain on high alert amid speculations that Japanese authorities will step in to prop up the Japanese Yen (JPY), which is seen as another factor weighing on the GBP/JPY cross. The JPY bulls, however, seem hesitant amid a wide gap in Japan's borrowing costs and other major economies, including the UK. This keeps the so-called carry trade active, which, along with economic risks stemming from the Middle East crisis, favors JPY bears.

The fundamental backdrop suggests that the path of least resistance for the GBP/JPY cross is to the upside, and any subsequent slide is more likely to be bought into. Hence, it will be prudent to wait for strong follow-through selling before positioning for the resumption of the pair's recent retracement slide from the highest level since January 2008, touched earlier this month. Bulls, however, might refrain from placing aggressive bets ahead of the Bank of Japan (BoJ) decision on Friday.

Economic Indicator

BoE Interest Rate Decision

The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.

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