GBP/JPY slides to 210.00 amid UK political drama, divergent BoE-BoJ outlooks

The GBP/JPY cross attracts sellers for the second consecutive day on Friday and drops to the 210.00 psychological mark heading into the European session. With the latest leg down, spot prices have retreated over 200 pips from over a two-week high – levels beyond the 212.00 mark touched on Wednesday – and seem vulnerable to depreciate further.

The British Pound (GBP) is pressured by the domestic political drama, while the Japanese Yen (BoJ) benefits from revived bets for an imminent interest rate hike by the Bank of Japan (BoJ), exerting downward pressure on the GBP/JPY cross. The Green party pulled off a landmark victory in the Gorton and Denton by-election, with the Conservatives and Liberal Democrats losing their deposits as they won fewer than 5% of the votes. The outcome underscored the current unpredictability and the breakdown of Britain's two-party politics.

Apart from this, the Bank of England (BoE) easing expectations turned out to be another factor undermining the GBP. During his testimony before the Parliament’s Treasury Committee, BoE Governor Andrew Bailey signaled earlier this week that there is scope for interest rate cuts amid expectations that inflation will return to the 2% target. This marks a significant divergence in comparison to the BoJ's hawkish outlook, which, along with sustained safe-haven buying, benefits the safe-haven JPY and contributes to the GBP/JPY pair's slide.

Data released earlier today showed that the consumer inflation in Tokyo – Japan's capital city – cooled below the Bank of Japan's (BoJ) 2% target for the first time since 2024. The inflation, however, remains well above historic levels. Moreover, BoJ Governor Kazuo Ueda said on Thursday that the basic stance is to continue raising rates if the likelihood of our economic and price forecasts materialising heightens. Adding to this, BoJ Board Member Hajime Takata said that the central bank must conduct further interest rate hikes in a gradual manner.

Meanwhile, investors remain on edge on the back of persistent uncertainties surrounding US President Donald Trump's erratic trade policies and the risk of US strikes on Iran. This continues to underpin demand for traditional safe-haven assets. That said, reports suggest that Japan's Prime Minister Sanae Takaichi had expressed reservations about further monetary tightening ‌during her meeting with the governor. This might hold back the JPY bulls from placing aggressive bets and could offer some support to the GBP/JPY cross.