GBP/JPY climbs back above mid-199.00s; BoJ's hawkish stance could limits gains

• GBP/JPY regains positive traction on Wednesday amid a supportive fundamental backdrop.
• Diminishing odds for an immediate BoE rate cut act as a tailwind for the British Pound.
• Hawkish BoJ expectations underpin the JPY and might  cap any further gains for the cross.

The GBP/JPY cross stalled this week's retracement slide from the 200.35 region, or its highest level since July 2024, and staged a goodish intraday recovery from the weekly low touched on Tuesday. The momentum extends through the Asian session on Wednesday and lifts spot prices back above mid-199.00s in the last hour.

The British Pound (GBP) continues with its relative outperformance against its Japanese counterpart amid diminishing odds for an immediate interest rate cut by the Bank of England (BoE). The Japanese Yen (JPY), on the other hand, is undermined by bets that domestic political uncertainty could temporarily hinder the Bank of Japan (BoJ) from normalising policy. Apart from this, a generally positive risk tone is seen as another factor acting as a tailwind for the GBP/JPY cross.

However, the risk of a further escalation of geopolitical tensions and persistent trade-related uncertainties could limit deeper losses for the safe-haven JPY. Furthermore, investors have been pricing in the possibility of an imminent BoJ rate hike by the end of this year. In contrast, BoE Governor Andrew Bailey said recently that interest rates would continue to move downwards gradually over time. The divergent BoJ-BoE policy outlook might cap gains for the GBP/JPY cross.

The aforementioned mixed fundamental backdrop warrants some caution for bullish traders and positioning for any further near-term appreciating move in the absence of any relevant market-moving economic releases from the UK or Japan. Traders might also opt to move to the sidelines ahead of the UK macro data dump on Friday, including the monthly GDP print, which will play a key role in influencing the GBP and providing some meaningful impetus to the GBP/JPY cross.