The Bank of England's cautious approach continues to support the GBP, aided by improving global risk sentiment. On the other hand, despite the hawkish candidate Ishiba being elected as Japan's new Prime Minister, the recent comments from BoJ Governor Ueda, indicating that a rate hike is not imminent, suggest that the yen's bullish momentum from this political shift may be short-lived.

GBP: Strong Momentum

The BoE's decision to hold rates and signal a gradual approach to easing has been perceived as slightly hawkish, providing stability to the GBP. Sterling continues to benefit from strong UK economic momentum and its pro-cyclical nature, especially as the resilient US economy has led markets to price out recession risks. This environment, coupled with the BoE’s patient stance, has attracted inflows into GBP, with expectations of a more moderate easing cycle compared to other central banks. Additionally, the UK’s real interest rates, the highest among major developed markets, further support the currency. Strong PMIs and moderating inflation due to cheaper commodity imports also contribute to the positive outlook, while the widening GBP-USD rate differential underpins GBP/USD. At the same time, EUR/GBP remains under pressure due to weaker Eurozone growth.

However, much of the positive sentiment may already be reflected in the price, and GBP could struggle to extend recent gains in the near term. With a light UK data calendar next week, investor focus is likely to shift to speeches from BoE members Huw Pill and Megan Greene. Should they reaffirm a gradual easing approach, the GBP rally may lose momentum, particularly if markets start to anticipate further rate cuts later this year. Moreover, rising national debt and government spending ahead of the 30 October budget announcement could add to the UK's fiscal challenges, potentially accelerating BoE rate cuts, which would weigh on the mid-term GBP outlook. Nevertheless, barring any negative domestic developments, the GBP could remain supported by global risk sentiment improvements.

JPY: New Prime Minister

The yen's gradual strengthening is progressing in the right direction but at a slower pace than market expectations, largely due to the ongoing expansion in the U.S. economy and the reduced likelihood of an imminent recession. A rapid yen appreciation would undermine the Bank of Japan's (BoJ) goal of achieving sustained positive inflation. BoJ Governor Kazuo Ueda recently reiterated that the bank is in no rush to raise rates and will take time to assess domestic developments, which contributed to pushing USD/JPY higher. This aligns with his previous dovish comments, indicating that upside risks to inflation are easing, reducing speculation of a rate hike at the upcoming 31 October BoJ meeting. Absent any major surprises in U.S. data, the likelihood of USD/JPY dropping below 140 in the near term appears low. Instead, with a gradual Fed recalibration and the BoJ likely tightening only in 2025, USD/JPY may rise in the short term.

In addition, Shigeru Ishiba has won the LDP leadership race and will become Japan’s next prime minister, which is positive news for yen bulls. Ishiba, known for supporting continued BoJ rate hikes, could further bolster expectations for a stronger yen. However, given Ueda’s recent comments that a near-term hike is unlikely, the bullish momentum for the yen from this political shift may be short-lived.

Looking ahead, Japan's Tankan survey, industrial production, and retail sales data will be crucial for the yen, potentially indicating that the economy is not yet ready for further rate hikes. However, the most important driver for the yen in the coming week will be U.S. economic data, particularly labor market figures. Strong U.S. data could reduce expectations of steep Fed rate cuts, weighing on the yen. Investors should also keep an eye on U.S. presidential election opinion polls, as a surge in Kamala Harris' odds could also support a USD/JPY bounce.

GBP/JPY 4H Chart

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