British Pound bulls seem hesitant as intervention fears and hawkish BoJ bets support Yen

The GBP/JPY cross extends its directionless price moves through the early European session on Thursday, though it holds above the weekly low and currently trades around the 218.15-218.20 region. Speculations that Japanese authorities will step in to prop up the domestic currency act as a headwind for spot prices, though the supportive fundamental backdrop favors bullish traders.

Japan's Finance Minister Satsuki Katayama reiterated that the government was ready to take ‌decisive action on foreign exchange as needed. Furthermore, reports on Thursday indicated that Bank of Japan (BoJ) officials are open to raising interest rates at a faster pace, offering additional support to the Japanese Yen (JPY). The British Pound (GBP), on the other hand, remains on the defensive on the back of Wednesday's mixed UK inflation figures, which further contributes to capping the GBP/JPY cross.

The downside, however, remains cushioned in the wake of a stark contrast in monetary policy between Japan and the rest of the world. In fact, borrowing costs in Japan remain exceptionally low relative to other major economies, including the UK. The Bank of Japan (BoJ) has cautiously started to normalize policy and lifted the short-term policy rate in June to 1.00%, or the highest since 1995. The Bank of England's (BoE) base rate is at 3.75%, leaving an interest rate differential of around 275 basis points (bps).

This keeps the so-called carry trade active, which has been a key factor behind the JPY's relative underperformance. Adding to this, investors remain worried that Japan’s economy remains vulnerable to a global energy supply chain shock amid a significant fall in shipping traffic through the Strait of Hormuz due to escalating US-Iran tensions. This, in turn, favors JPY bears, suggesting that any corrective pullback in the GBP/JPY cross could be seen as a buying opportunity and is more likely to remain limited.