GBP/JPY holds above 196.00 as traders await BoE policy update on Thursday

• GBP/JPY struggles to capitalize on the previous day’s recovery from a seven-week low.
• The divergent BoJ-BoE policy expectations seem to act as a headwind for spot prices.
• Traders now seem reluctant and opt to wait for the crucial BoE decision on Thursday.

The GBP/JPY cross attracts some sellers in the vicinity of mid-196.00s during the Asian session on Wednesday and, for now, seems to have stalled the previous day’s goodish recovery move from the lowest level since June 19. Spot prices, however, manage to hold above the 196.00 mark as traders seem reluctant to place aggressive bets ahead of this week’s key central bank event.

The Bank of England (BoE) is scheduled to announce its policy decision on Thursday and is widely expected to cut interest rates by 25 basis points (bps) to 4% amid concerns around job market prospects. In fact, the UK labour market has weakened recently, and pay growth has cooled more quickly than the BoE’s forecast in May. However, signs of still sticky inflation suggest that the committee is likely to remain cautious. Nevertheless, the outlook will play a key role in influencing the British Pound (GBP) and provide some meaningful impetus to the GBP/JPY cross.

In the meantime, expectations that the Bank of Japan (BoJ) will hike interest rates by the end of this year act as a tailwind for the Japanese Yen (JPY) and could act as a headwind for the currency pair. The BoJ last week revised its inflation forecast at the end of the July meeting, and reiterated that it will hike interest rates further if growth and inflation continue to advance in line with its estimates. This marks a big divergence in comparison to dovish BoE expectations and warrants some caution before placing aggressive bullish bets around the GBP/JPY cross.

Even from a technical perspective, last week’s breakdown below the 50-day Simple Moving Average (SMA) suggests that the path of least resistance for spot prices remains to the downside. That said, a generally positive tone around the equity markets might keep a lid on any meaningful appreciating move for the safe-haven JPY and help limit losses for the GBP/JPY cross.