GBP/JPY retreats from 14-month high as BoJ hike bets rise

• GBP/JPY pulls back from a 14-month high near 200.35, trades around 199.00 on Tuesday.
• The BoJ is expected to hold rates steady next week, but markets price in a hike by year-end.
• Traders eye BoE Deputy Governor Sarah Breeden's speech due later Tuesday for fresh monetary policy clues.

GBP/JPY is trading lower on Tuesday, extending its pullback from Monday's 14-month high near 200.35, as investors reassess the monetary policy outlook on both sides of the cross. At the time of writing, the GBP/JPY cross is holding firm near 199.00, down 0.35% on the day, with the Japanese Yen (JPY) finding renewed demand amid expectations of Bank of Japan (BoJ) normalization.

A Bloomberg report published Tuesday noted that BoJ policymakers still see a chance of a rate hike before year-end, despite domestic political turbulence following Prime Minister Ishiba's resignation. However, officials are inclined to stand pat next week and keep interest rates unchanged at 0.5% as they await clearer signs that inflationary pressures, particularly those driven by wages, are sustainably anchored. Market pricing reflects this cautious stance, with only a 16% probability of a September hike, though expectations for a move by December remain firm. Money markets are now pricing in a 64% chance of a BoJ rate increase by year-end, up from 44% last week.

Meanwhile, the British Pound (GBP) is struggling to maintain momentum, as fiscal uncertainty begins to weigh on sentiment ahead of the UK's Autumn Budget. On Tuesday, Chancellor Rachel Reeves urged cabinet ministers to intensify efforts to curb inflation and control public spending, reinforcing her alignment with the Bank of England's (BoE) monetary policy objectives. Reeves emphasized the importance of fiscal discipline in supporting the central bank's inflation mandate, while warning that any deviation could undermine market confidence. Her comments come as markets push back expectations for further BoE easing, with traders now anticipating the next rate cut only in Q2 2026, despite the central bank's dovish tilt in August.

Looking ahead, the monetary policy paths of the BoJ and BoE continue to diverge, offering contrasting signals to currency markets. While the BoJ remains cautious and data-dependent, reluctant to tighten until wage growth becomes more consistent, the BoE has already taken its first step toward easing, but is signaling a slow and limited cutting cycle. This divergence could keep GBP/JPY volatile in the near term, as traders remain focused on incoming economic data and fresh signals from central bank officials.

In the UK, attention turns to BoE Deputy Governor Sarah Breeden's speech later on Tuesday, followed by a crucial batch of data on Friday, including July GDP, manufacturing and industrial production, trade balance figures, and consumer inflation expectations, all of which could influence the Bank of England's policy path and near-term Sterling direction.