GBP/JPY retreats as strong Japan GDP boosts Yen and fuels BoJ tightening bets

• GBP/JPY slips toward 199.50 after failing to sustain gains above 200.00, as strong Japan GDP revives Yen demand.
• Japan's Q2 GDP and sticky inflation fuel BoJ tightening bets, with markets eyeing a potential October rate hike.
• Reuters poll expects Japan's core CPI to rise 3.0% in July, down from 3.3% in June.

The GBP/JPY cross is edging lower on Friday, with the cross weakening toward the 199.50 handle after briefly touching the 200.00 psychological level on Thursday. The move snaps a short-lived recovery from the previous day as investors react to surprisingly strong Japanese Gross Domestic Product (GDP) data and rising expectations that the Bank of Japan (BoJ) may shift toward policy tightening in the coming months, lending fresh support to the Yen.

Japan's preliminary Q2 GDP data painted a much stronger growth picture than expected. The economy expanded by 1.0% on an annualized basis, handily beating forecasts of 0.4% and a prior reading of 0.6%. On a quarterly basis, GDP rose 0.3% QoQ, also topping expectations of 0.1%.

While the GDP Deflator -- a key measure of inflation -- eased to 3.0% YoY, slightly below both the prior reading of 3.3% and the consensus forecast of 3.1%.

Adding to the bullish Yen narrative, a Reuters poll of 20 economists released Friday showed that Japan's core Consumer Price Index (CPI) is expected to have risen 3.0% YoY in July, easing from 3.3% in June.

Despite the slight cooling, the figure remains well above the BoJ's 2% inflation target, reinforcing the view that underlying price pressures are persistent. Markets are increasingly pricing in the possibility of a rate hike as early as October.

In contrast, the British Pound remains somewhat cushioned after data released Thursday showed the UK economy grew 0.3% in Q2, beating consensus estimates of 0.1%. The resilience in construction and services helped offset post-election uncertainty and the drag from US-imposed tariffs.

Earlier this month, the Bank of England (BoE) delivered a 25 bps rate cut, lowering its Bank Rate to 4.00%. However, the stronger-than-expected GDP print may prompt policymakers to adopt a more patient easing approach. BoE Chief Economist Huw Pill recently noted that lingering inflation risks and internal divisions could slow the pace of further rate cuts, reinforcing the view that any additional policy loosening will proceed gradually and cautiously.