GBP/JPY falls sharply as dovish BoE decision pressures Pound Sterling

• Pound Sterling falls sharply after a dovish Bank of England decision.
• A highly split Monetary Policy Committee vote strengthens expectations of further rate cuts.
• Losses are amplified against the Japanese Yen, despite persistent fragility in the Japanese currency.

GBP/JPY trades around 212.70 on Thursday at the time of writing, down 0.70% on the day, as Pound Sterling (GBP) comes under strong pressure following the Bank of England’s policy announcement. The British currency weakens against most of its major peers after the central bank kept its policy rate unchanged at 3.75%, while revealing a much more divided vote than markets had anticipated.

The Bank of England (BoE) left interest rates on hold, but five out of nine members of the Monetary Policy Committee (MPC) voted for no change, while four policymakers already call for a 25-basis-point rate cut. This more dovish-than-expected split reinforces the view that the monetary easing cycle could resume sooner than previously expected. The BoE also reiterates its outlook for gradual monetary easing, though it refrains from providing a specific timeline for future rate cuts.

During the press conference, Governor Andrew Bailey stressed that disinflation is on track and progressing faster than previously expected, while emphasizing the need to ensure that inflation returns sustainably to the 2% target. He noted that there is scope for further monetary easing if the economic outlook evolves as projected, but declined to endorse any specific terminal rate, urging caution instead.

Against the Japanese Yen (JPY), the Pound Sterling’s decline remains pronounced, even though the Japanese currency faces vulnerabilities of its own. The JPY continues to be weighed down by expectations of fiscal stimulus following the lower house elections scheduled for February 8, a factor that fuels concerns about a widening budget deficit. 

According to Societe Generale analysts, the Japanese Yen remains weak despite significant undervaluation and an improved balance of payments, as worries about the trajectory of public debt continue to weigh on the currency.

In this environment, GBP/JPY dynamics mainly reflect the rapid deterioration in sentiment surrounding Pound Sterling, as investors adjust their positions in response to a more dovish Bank of England, while fiscal uncertainties in Japan continue to limit, for now, the extent of any Japanese Yen recovery.