GBP/JPY Holds Near 195.50 Amid Market Focus on UK Labor Data

The GBP/JPY pair pauses its two-day rally, trading around 195.40 during the Asian session on Tuesday. Despite the pullback, the downside remains limited as the Japanese Yen (JPY) faces potential depreciation due to growing expectations that the Bank of Japan (BoJ) may refrain from raising interest rates during its policy meeting on Thursday.

Market sentiment currently assigns less than a 30% probability to a December rate hike by the BoJ. Policymakers appear cautious about tightening monetary policy further, citing minimal inflation risks despite Japan’s near-zero borrowing costs. Reports suggest the central bank is inclined to delay further action, awaiting clearer evidence of sustained wage growth before implementing additional measures.

Japan’s Economy Minister Ryosei Akazawa reaffirmed the BoJ’s collaboration with the government to adopt appropriate monetary policies. Meanwhile, Japan’s 10-year government bond yield climbed to 1.08% on Tuesday, influenced by a rise in US Treasury yields. This movement stems from speculation that the US Federal Reserve may signal fewer rate cuts for 2024, even as it is expected to reduce borrowing costs by 25 basis points on Wednesday.

On the UK side, the S&P Global/CIPS Purchasing Managers’ Index (PMI) data revealed mixed results. While overall business activity maintained steady growth at 50.5 in December, the Manufacturing PMI dropped to 47.3 from November’s 48.0. In contrast, the Services PMI showed stronger-than-expected growth at 51.4, surpassing both the 51.0 forecast and the previous 50.8 reading.

Despite the steady performance, survey participants highlighted concerns over fragile consumer confidence, tighter corporate budgets, and reduced non-essential spending, which cloud the business outlook.

Key focus now shifts to the UK labor market data due Tuesday, followed by Wednesday’s Consumer Price Index (CPI) inflation figures. These releases will set the stage for the Bank of England’s (BoE) rate decision on Thursday. The BoE is widely expected to hold interest rates steady, with an eight-to-one vote anticipated, as one dovish member is likely to advocate for a rate cut.