GBP/JPY holds losses near 192.50 due to increased likelihood of BoJ rate hikes

• GBP/JPY depreciates as the Japanese Yen gains ground amid rising expectations of the BoJ hiking interest rates on Friday.
• Japan’s trade surplus rose to ¥130.9 billion in December, against market expectations of a ¥55 billion deficit.
• The Pound Sterling comes under pressure as higher-than-expected UK Public Sector Net Borrowing data for December clouds the economic outlook.

GBP/JPY pauses its four-day rally, trading near 192.50 during Thursday’s European session. The GBP/JPY cross faces headwinds as the Japanese Yen (JPY) regains some strength amid rising expectations that the Bank of Japan (BoJ) will announce an interest rate hike after its two-day policy meeting on Friday. Supporting the JPY further is Japan’s better-than-expected Trade Balance data.

Japan reported a trade surplus of ¥130.9 billion in December, significantly outperforming market expectations of a ¥55 billion deficit. This shift was primarily driven by stronger-than-expected export growth, which rose 2.8% year-over-year in December, though it marked a slowdown from the 3.8% increase recorded in November. Meanwhile, imports recovered after contracting by 3.8% YoY in November, growing 1.8% last month. However, this fell short of the anticipated 2.6% growth, reflecting continued weakness in domestic demand.

The Pound Sterling (GBP) faces pressure after higher-than-expected UK Public Sector Net Borrowing data for December dampened the economic outlook. According to the Office for National Statistics (ONS), elevated borrowing costs and a one-time payment for repurchasing military housing contributed to a wider budget deficit.

Adding to the downward momentum, the British Pound is weighed down by recent data including softer-than-expected UK inflation and retail sales data for December, weakening labor demand over the three months to November, and tepid GDP growth. These factors have led traders to anticipate a 25 basis point (bps) rate cut by the Bank of England (BoE) in February. Markets are now pricing in a near-certain reduction in the BoE’s policy rate to 4.5% at its upcoming meeting.