GBP/JPY remains on the defensive below 198.00 amid expectations for BoJ rate hike

• GBP/JPY trades in negative territory for the sixth consecutive day near 197.75 in Friday’s early European session. 
• The increase in Japan’s Tokyo core CPI inflation maintains the possibility of a BoJ rate hike next week.
• The BoE is expected to cut its interest rate by 25 bps next week. 

The GBP/JPY cross loses ground around 197.75 during the early European session on Friday. The Japanese Yen (JPY) edges higher as traders potentially unwind their carry trades ahead of the Bank of Japan's (BoJ) monetary policy meeting next week. 

Data released by the Statistics Bureau of Japan on Friday revealed that the headline Japan’s Tokyo Consumer Price Index (CPI) increased 2.2% YoY in July, compared to a 2.3% rise in June. Meanwhile, Tokyo CPI ex Fresh Food rose 2.2% in July versus 2.1% prior and was in line with the market consensus. This figure registered the third straight month of re-acceleration after a decline of 1.6% year on year in April. 

Japan’s Tokyo CPI inflation reports support the case of a BoJ rate hike next week, which has lifted the JPY against the GBP. Financial markets are now pricing in a 38% probability of a 15 basis points (bps) hike.

Furthermore, the fear of further foreign exchange (FX) intervention from the Japanese authorities might continue to underpin the Japanese Yen and create a headwind for EUR/JPY. Early Friday, Japan's top currency diplomat, Masato Kanda said that excessive FX volatility has a negative impact on the Japanese economy, adding that he will closely monitor the economy and implement necessary measures if necessary.  

On the GBP’s front, the rising expectation that the Bank of England (BoE) would cut interest rates at its upcoming policy meeting on August 1 weighs on the Cable. As per UBS analysts, the BoE is expected to lower its interest rates by 25 basis points (bps) in early August, followed by another 25 bps in November, reducing the rate to 4.75% by the end of 2024.