GBP/JPY declines towards 162.00 despite odds of widening BOE-BOJ policy divergence

• GBP/JPY is expected to drop to near 162.00 amid BOJ planning on intervention in the currency market.
• UK PM Liz Truss has announced a reduction in tax slabs and a cap on energy and electricity prices.
• A rate hike announcement by the BOE will widen the BOE-BOJ policy divergence further.

The GBP/JPY pair has surrendered the critical support of 162.20 in the Asian session and is declining towards 162.00 modestly. The asset has turned bearish after a downside break of the consolidation formed in a 162.80-164.47 range. The cross has shifted into the negative trajectory despite accelerating odds of further expansion in Bank of England (BOE)-Bank of Japan (BOJ) policy divergence.

Price pressures in the UK economy are acting as headwinds for UK households. The latter is forced to make inflation-adjusted payouts with penny-worth increments in earnings. No doubt, the labor market conditions, growth prospects, and energy prices are not supporting a rate hike by the BOE. However, BOE Governor has to swallow the bitter gulp and announce a rate hike by 50 basis points (bps).

Meanwhile, operations from new UK Prime Minister Liz Truss seem favorable for the economy led by the announcement of a reduction in tax slabs, a cap on energy and electricity prices, and a trade deal with the US. In spite of this fact, the pound bulls are not getting stronger.

On the Tokyo front, BOJ’s warning o intervention in the currency market is supporting the Japanese yen. Japan’s former Vice FM Tatsuo Yamasaki cited that the Japanese administration is ready to intervene in currency markets at any moment if needed, news wires from Bloomberg. He further added that the government doesn’t need to wait for a green light from the US to support the yen.

The approach to monetary policy by the BOJ is expected to remain ‘neutral’ as growth prospects and inflation catalysts still need care from the economy. This will widen the BOE-BOJ policy divergence further.