GBP/JPY holds losses near 195.50 ahead of UK labor market

• GBP/JPY may regain its ground as the BoJ is widely expected to avoid a rate hike on Thursday.
• BoJ policymakers appear reluctant to tighten monetary policy further.
• The Pound Sterling remains subdued ahead of UK employment figures.

GBP/JPY halts its two days of gains, trading around 195.40 during the Asian hours on Tuesday. However, the downside of the GBP/JPY cross would be limited as the Japanese Yen (JPY) may depreciate amid the rising likelihood that the Bank of Japan (BoJ) may avoid an interest rate hike on Thursday.

The markets are currently pricing in less than a 30% chance of a BoJ’s rate hike in December. Several Bank of Japan (BoJ) policymakers seem in no hurry to tighten monetary policy further, given the minimal risk of inflation overshooting despite Japan's persistently near-zero borrowing costs.

Reports suggested the central bank sees "little cost" in delaying further tightening, preferring to wait for more evidence of wage growth before implementing additional policy adjustments. Japan's economy minister, Ryosei Akazawa, reaffirmed that the Bank of Japan and the government will collaborate on appropriate monetary policies.

Japan’s 10-year government bond yield rose to near 1.08% on Tuesday, mirroring the upward movement in US Treasury yields as speculation grew that the US Federal Reserve could signal fewer interest rate cuts for next year. However, the Fed is still widely expected to reduce borrowing costs by 25 basis points on Wednesday.

UK S&P Global/ CIPS Purchasing Managers’ Index (PMI) report showed that the overall business activity expanded at a steady pace to 50.5 in December. Meanwhile, the Manufacturing PMI declined at a faster pace to 47.3 from 48.0 in November. The Service sector activity expanded at a faster pace to 51.4, from the estimates of 51.0 and the former release of 50.8.

While the data indicated steady overall growth, survey respondents expressed concerns about the business outlook, citing fragile consumer confidence, tighter corporate budgets, and reductions in non-essential spending.

Traders are set to monitor the UK employment data on Tuesday, followed by the Consumer Price Index (CPI) inflation figures on Wednesday, ahead of the Bank of England's (BoE) rate decision on Thursday. The BoE is widely expected to maintain interest rates, with an anticipated eight-to-one vote split, as one notably dovish policymaker is likely to support a rate cut.