GBP/JPY extends slide as traders brace for BoE rate decision

• GBP/JPY down nearly 0.37% around 194.40, testing 21-day EMA support.
• UK core inflation eased to 3.5% in May, while headline CPI came in line with expectations at 3.4%.
• Widening policy divergence broadly favors the Pound but limits short-term gains amid risk aversion.
• Japan's national CPI due Friday may hint at sticky inflation, possibly nudging BoJ to tighten slowly.

The British Pound (GBP) extends its decline for the second consecutive day against the Japanese Yen (JPY) on Wednesday, as cautious sentiment dominates the market ahead of the Bank of England's (BoE) key interest rate verdict due on Thursday. The safe-haven Yen finds modest support amid subdued risk appetite, while British Pound traders remain hesitant to place aggressive bets until the BoE's policy direction becomes clearer.

GBP/JPY edges lower during the American trading hours, down nearly 0.37% at the time of writing as it retreats from the intraday peak of 195.35 to trade around 194.40. The pair is hovering near its 21-day Exponential Moving Average (EMA), which is acting as a short-term pivot amid cautious market sentiment.

Earlier in the day, fresh UK inflation data offered mixed cues for Sterling traders. The annual core inflation rate eased to 3.5% in May, slipping from April's one-year high of 3.8% and slightly undershooting market forecasts of 3.6%. Meanwhile, the headline annual inflation rate edged down to 3.4% from 3.5% previously, matching expectations. The softer core figure has fueled speculation that the Bank of England could adopt a more cautious tone in the near term, especially with broader price pressures showing signs of moderation.

Looking ahead to Thursday's BoE policy decision, markets are firmly pricing in a hold on the Bank Rate at 4.25%, with around a 90% probability attributed to this outcome. Policymakers are likely to strike a balanced message, acknowledging the progress in cooling inflation while staying alert to underlying price stickiness. Money markets are currently pricing in the first rate cut as early as August, with another likely by the end of the year. However, any dovish tilt in forward guidance could weigh further on the Pound's near-term appeal against safe-haven counterparts like the Yen.

The wider policy divergence between the Bank of England and the Bank of Japan remains a key theme supporting GBP/JPY over the medium term. While the BoE holds one of the highest policy rates among developed economies, the BoJ remains firmly accommodative, keeping rates close to zero and sticking to a cautious stance on tightening. This yield gap generally underpins the British Pound's advantage. However, safe-haven demand for the Yen and any signs of stickier Japanese inflation -- with Japan's CPI due Friday -- could cap the pair's upside and keep traders focused on fresh macro signals for the next move.