GBP/JPY rises on weak Japanese trade data, CPI in focus

• The British Pound rises against the Japanese Yen on Thursday amid fragile JPY sentiment.
• Japan's June trade surplus falls short of expectations, with auto exports to the US down 26.7%.
• UK Unemployment Rate climbs to 4.7%; Average Earnings Excluding Bonus slow to 5.0% YoY.

The British Pound (GBP) gains positive traction against the Japanese Yen (JPY) on Thursday as sentiment surrounding the Yen remains fragile following Japan's disappointing Trade Balance data. Investor caution is also mounting ahead of Japan's upper-house election on July 20, which could prompt shifts in fiscal and economic policy.

The GBP/JPY cross is holding firm during the American trading hours, hovering close to its intraday high of 199.56. At the time of writing, the pair is trading around 199.30, retracing most of the previous day's losses. That said, the cross remains trapped within a tight trading range that has been in place for over a week.

Japan's trade report for June showed the country posted a surplus of ¥153.1 billion, sharply below market expectations of ¥353.9 billion. Exports dropped 0.5% YoY, largely dragged down by a 26.7% plunge in auto shipments to the United States as US tariffs begin to bite. Imports edged up 0.2%, further weighing on the trade balance. The disappointing figures raise concerns over the health of Japan's export-driven economy and underscore the pressure on the Yen, especially amid limited scope for the Bank of Japan (BoJ) to tighten policy in the face of external headwinds and domestic uncertainty.

Meanwhile, the Pound finds support as traders digest a fresh batch of UK economic data. The Unemployment Rate rose to 4.7% in the three months to May, while Average Earnings Excluding Bonus slowed to 5.0% YoY, slightly above market expectations of 4.9%, signaling a cooling but still resilient labour market. However, inflation data released on Wednesday surprised to the upside with the Consumer Price Index (CPI) climbing to 3.6% in June, well above the Bank of England's 2% target. This combination of rising unemployment and persistent inflation presents a challenge for policymakers. While the softening labour market strengthens the case for interest rate cuts, sticky inflation may delay the Bank of England's (BoE) timeline, keeping markets on edge.

Looking ahead, attention shifts to Japan's National Consumer Price Index (CPI) data, due on Thursday. The report is expected to shed light on domestic inflation dynamics and could influence market expectations around the Bank of Japan's next policy move. Although core inflation has remained above the BoJ's 2% target in recent months, the central bank has adopted a cautious stance, citing subdued domestic demand and external pressures. A stronger-than-expected CPI reading may revive speculation about a gradual policy shift, while a softer print could reinforce the Yen's downside bias and maintain the current policy divergence with major central banks.