GBP/JPY halts three-day losing streak, rises to 193.60 as UK-EU reset lifts sentiment

• GBP/JPY edges up to 193.60 on Monday, snapping a three-day losing streak after hitting an intraday low at 192.78.
• UK and EU hail new defense and security pact as a post-Brexit "reset" in relations; Pound Sterling gains modestly.
• Broader risk sentiment and policy divergence continue to shape GBP/JPY flows.

GBP/JPY is trading modestly higher near 193.60 on Monday, snapping a three-day losing streak. The pair experienced some volatility early in the session, briefly falling to a low of 192.78 before paring losses. The cross draws support from improved political sentiment in Europe following a landmark UK-EU agreement, while diverging monetary policy paths between the Bank of England (BoE) and the Bank of Japan (BoJ) continue to shape flows.

The United Kingdom and the European Union have formally reached a wide-ranging agreement covering defense cooperation, youth mobility, cybersecurity, and maritime safety, with both sides describing it as a potential "reset" in their relationship five years after Brexit. UK Prime Minister Keir Starmer called the deal a chance to move beyond "stale old debates" to focus on practical collaboration. 

As part of the accord, UK companies may gain access to the EU's €150 billion SAFE defense fund, a move that could deepen economic and security ties. The news has boosted sentiment toward the Pound, easing political risk and improving the outlook for cross-border investment and trade.

On the monetary front, the BoE delivered a cautious rate cut in its last meeting, marking the start of a gradual easing cycle. While the central bank acknowledged progress in bringing down inflation, it emphasized that policy needs to remain restrictive for a sufficient period to ensure price stability. The BoE's guidance reflects a delicate balancing act: supporting growth without prematurely loosening conditions in the face of still-sticky services inflation.

In contrast, the BoJ is maintaining its current higher interest rate setting, having exited negative rates earlier this year. Deputy Governor Shinichi Uchida reiterated that the central bank remains open to further gradual rate hikes but stressed that any action would depend on the evolution of economic conditions. The BoJ is particularly focused on global trade headwinds, including uncertainty around US tariffs, and aims to stay flexible as external risks evolve.

Looking ahead, UK Consumer Price Index (CPI) data due Wednesday and Japan's CPI report on Thursday could offer the next catalysts for GBP/JPY as traders reassess inflation trends and central bank expectations. For now, the pair remains supported by easing UK political tensions and ongoing BoJ caution.