GBP/JPY. Analysis and Forecast

[Ben Graham]

Today, on Tuesday, the British pound is showing gains against the Japanese yen, which continues to face pressure due to Japan's ambitious fiscal initiatives and the Bank of Japan's restrained approach to monetary tightening. At the moment, the GBP/JPY pair is trading near 204.25, hovering around the five-week high reached on Monday.

Even so, the atmosphere surrounding the pound sterling remains fragile, as market participants await the UK's budget on November 26 amid uncertainties over the government's tax and spending plans. Recent reports indicate that the Treasury is considering additional revenue options after rejecting an income tax increase, including the potential introduction of a property tax.

At the same time, rising expectations of a December rate cut by the Bank of England are adding pressure to the pound. Traders are reacting to signs of a slowing British economy, such as decelerating wage growth and rising unemployment, while inflation appears to have peaked.

The focus is now shifting to Wednesday's October Consumer Price Index report. Headline inflation is forecast to fall from 3.8% to 3.6% year-over-year, and core inflation from 3.5% to 3.4%.

Adding to the cautious tone, Bank of England Chief Economist Huw Pill struck a moderate but slightly dovish note on Tuesday, saying policymakers face "a series of delicately balanced choices." Speaking at a Natixis event, Pill emphasized that underlying inflationary pressures in the UK are "likely not as intense as the headline numbers suggest."

He cautioned against overinterpreting fresh data, pointing to abnormal noise in some key indicators, and added that if clearer signs of recession appear, he will "have to take action."

In Japan, ambitious fiscal plans and the Bank of Japan's gradual approach to policy adjustment continue to weaken the yen.

Earlier the same day, a meeting between BOJ Governor Kazuo Ueda and Prime Minister Sanae Takaichi failed to support the yen. Ueda informed the prime minister that the BOJ is "in a phase of gradually adjusting the degree of monetary easing," seeking a smooth, sustainable return of inflation to the 2% target. He later confirmed that Takaichi did not make any specific requests regarding monetary policy.

Japan's Finance Minister Satsuki Katayama expressed concern over the yen's movement, stating that the government is "worried" about the recent currency fluctuations and will closely monitor the market for excessive or disorderly movements.

From a technical standpoint, the GBP/JPY pair's breakout above the 100-period moving average on the 4-hour chart last week—followed by a bounce off it—favors the bulls. Moreover, oscillators on both the daily and 4-hour charts remain positive and far from overbought territory, reinforcing the optimistic forecast. To accelerate further upward movement, the cross-rate needs to break above 204.52 and hold above that level. After that, prices may speed up toward the October high around 205.30.

The nearest support for the pair lies at the round level of 204.00. A drop below it would accelerate the decline toward 203.30.

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