GBP/JPY flat lines above 198.00 as BoE-BoJ policy divergence caps gains ahead of UK PMIs

GBP/JPY remains hesitant to build a modest Asian session uptick on Thursday.
The divergent BoE-BoJ policy expectations act as a headwind for spot prices.
Traders now look forward to the flash UK PMI prints for short-term impetus.

Haresh Menghani FXStreet

The GBP/JPY pair holds steady above the 198.00 mark during the Asian session on Thursday, though the lack of any meaningful buying warrants caution before positioning for an extension of the overnight bounce from a nearly two-week low.

Despite hot UK consumer inflation figures released on Wednesday, the British Pound (GBP) struggles to lure buyers as traders are still pricing in a 50-50 chance that the Bank of England (BoE) might cut interest rates by the end of this year. This marks a significant divergence in comparison to a relatively hawkish Bank of Japan (BoJ), which contributes to the Japanese Yen's (JPY) relative outperformance and acts as a headwind for the GBP/JPY cross.

In fact, the BoJ revised its inflation forecast at the end of the July meeting and reiterated that it will raise interest rates further if growth and inflation continue to advance in line with its estimates. Apart from this, the cautious market mood is seen as another factor undermining the safe-haven JPY. However, the uncertainty over the likely timing of the next BoJ rate hike holds back the JPY bulls from placing aggressive bets and supports the GBP/JPY cross.

Meanwhile, the S&P Global flash Japan Manufacturing PMI improved to 49.9 in August from the previous month's final reading of 48.9, though it remained in contraction territory for the second straight month. Traders now look forward to the release of the flash UK PMIs for some impetus. In the meantime, the fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming a near-term bottom for the GBP/JPY cross.

Economic Indicator

S&P Global Composite PMI

The Composite Purchasing Managers Index (PMI), released on a monthly basis by S&P Global, is a leading indicator gauging private-business activity in UK for both the manufacturing and services sectors. The data is derived from surveys to senior executives. Each response is weighted according to the size of the company and its contribution to total manufacturing or services output accounted for by the sub-sector to which that company belongs. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), industrial production, employment and inflation.The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the UK private economy is generally expanding, a bullish sign for the Pound Sterling (GBP). Meanwhile, a reading below 50 signals that activity is generally declining, which is seen as bearish for GBP.

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