GBP/JP retreats further from YTD peak as verbal intervention aids JPY; holds above 203.00

• GBP/JPY extends this week's retracement slide from its highest level since July 2024.
• Some verbal intervention provides a boost to the JPY and exerts pressure on spot prices.
• The BoJ uncertainty and reduced bets for more BoE rate cuts could support the cross.

The GBP/JPY cross attracts some follow-through selling for the second consecutive day on Friday and retreats further from its highest level since July 2024, around the 205.30 region touched earlier this week. Spot prices currently trade around the 203.25 area, down 0.20% for the day, though remain on track to register strong weekly gains amid concerns about the fiscal outlook in Japan.

Sanae Takaichi's surprise win in the ruling Liberal Democratic Party's (LDP) leadership race last Saturday puts her on course to become the country's first female Prime Minister and fueled speculations about more expansionary fiscal policy. This, in turn, tempered expectations for an immediate interest rate hike by the Bank of Japan (BoJ), which, in turn, has been weighing heavily on the Japanese Yen (JPY) since the beginning of the current week.

However, Takaichi said that she did not want to trigger excessive declines in the JPY. This, along with some verbal intervention from Japan's Finance Minister Kato, provides some respite to the JPY bulls and exerts some downward pressure on the GBP/JPY cross. In fact, Kato said that it's important for currencies to move in a stable manner, and authorities will thoroughly monitor for excessive fluctuations and disorderly movements in the forex market.

Meanwhile, Takaichi's economic advisors - such as Etsuro Honda and Takuji Aida - were quoted as saying that Japan's new PM would probably tolerate another rate hike either in December or in January. Moreover, inflation in Japan has stayed at or above the BoJ's 2% target for more than three years, and the economy expanded for a fifth straight quarter in the three months through June. This keeps the door open for another BoJ rate hike and benefits the JPY.

Apart from this, the cautious market mood turns out to be another factor underpinning the safe-haven JPY and weighing on the GBP/JPY cross. The downside, however, seems limited amid expectations that the Bank of England (BoE) will keep interest rates on hold at 4% for the rest of this year as signs of faster inflation and a more resilient economy reduce the case for more easing. This could underpin the British Pound (GBP) and support the currency pair.