The GBP continue supported by the BoE’s gradual rate cuts and optimistic economic outlook. Higher UK yields and stronger GDP growth forecasts make GBP attractive, particularly against low-yield currencies Meanwhile, JPY faces bearish pressures due to BoJ’s cautious stance and Japan’s political uncertainty, with no major policy changes expected soon.

GBP: Gradual Cut

September’s UK labor data offered little additional guidance for the BoE, with the unemployment rate rising to 4.3% from 4.0% amidst some data quality concerns. Despite this, GBP is expected to outperform due to its positive correlation with global risk sentiment, which should lend support—particularly if U.S. equities continue to rise—making it an appealing choice against other rate-sensitive currencies like JPY. Additionally, the Bank of England’s commitment to a gradual approach to rate cuts (likely pausing in December) positions it as a notable outlier among major central banks. GBP should also gain relative to other European currencies, given the UK’s more favorable growth outlook and potential benefits from Chinese stimulus, which may bolster the UK’s terms of trade. Even if geopolitical tensions lead to rising oil prices, GBP may be less vulnerable than most European currencies. 

BoE members Mann and Pill have echoed views that inflation risks remain high, preferring to see clearer signs of reduced inflation persistence before considering rate cuts. Meanwhile, the new Labour government has introduced a moderately stimulative budget, pushing the limits on borrowing but with minimal market backlash, adding another supportive factor for GBP in the near term. With regard to potential U.S. tariffs under a Trump policy, the UK could be less exposed than the Eurozone, due to its trade deficit in goods with the U.S., potentially making GBP the least impacted G10 currency.

Looking ahead, markets will focus on October’s UK CPI. BoE Governor Bailey has recently emphasized a “gradual” approach to rate cuts, cautioning against rapid or significant reductions. Consequently, a sharper-than-expected drop in CPI, especially the services CPI could trigger a near-term sell-off in GBP.

JPY: Under pressures

The JPY is expected to remain under pressure in the near term due to a mix of domestic and global factors. The BoJ’s cautious stance, as reflected in the October Summary of Opinions, indicates that monetary tightening will proceed gradually. While the BoJ has signaled its readiness to raise rates if economic and price forecasts are met, there is no immediate urgency to act in December, with market expectations leaning toward a potential hike in January. Adding to this, political uncertainty under Prime Minister Shigeru Ishiba’s minority government further reduces the likelihood of bold policy changes in the short term.

The re-election of President Trump has intensified downward pressure on the JPY, which has already weakened significantly. Japanese policymakers have expressed concerns over excessive FX movements, particularly with USD/JPY towards the critical 155 level. While direct intervention is unlikely at this stage, a rapid move beyond 158 could prompt stronger verbal interventions or even action from the BoJ. Governor Ueda has warned that further yen depreciation risks reigniting inflationary pressures, aligning with the BoJ’s efforts to maintain inflation control.

In summary, the JPY is likely to remain under bearish pressure in the immediate term, driven by yield differentials and political challenges. However, caution is warranted as verbal interventions from Japanese authorities could influence market sentiment. The yen’s trajectory remains highly sensitive to both domestic policy signals and external developments in the near term.