Gains After BoE Cut While Yen Slips On BoJ Hike

Market moves this week have been somewhat counterintuitive, with neither the yen nor the pound reacting in the way many might have expected. The yen weakened after the Bank of Japan raised interest rates, while sterling edged higher following a Bank of England rate cut.

Both decisions were widely anticipated and largely priced in, meaning markets focused less on the actions themselves and more on the tone of accompanying statements and press conferences.

Friday’s main event was the Bank of Japan meeting. As expected, the central bank raised rates by 25 basis points to 0.75 percent, the highest level since September 1995. The move continues the BoJ’s slow and cautious normalisation away from decades of ultra-loose policy.

In its statement and during Governor Kazuo Ueda’s press conference, the Bank said underlying inflation is rising moderately and being supported by strong wage growth. Officials argued that the wage price cycle appears sustainable, allowing for further gradual tightening if economic conditions evolve as expected.

Despite the hike, policy remains accommodative, with real interest rates still deeply negative. The BoJ stressed there is no preset path for rates and reiterated it would remain flexible.

Markets reacted by selling the yen. USD/JPY briefly moved above 156 as investors judged that guidance was not as hawkish as some had anticipated. Japanese government bond yields rose, with the 10 year yield climbing above 2 percent, while the Nikkei rallied. There were no immediate signs of a disruptive carry trade unwind.

Pound Stable Following BoE Cut

The BoJ decision capped a busy pre-Christmas week that also included a Bank of England rate cut, an ECB hold, US CPI data and two US jobs reports, including the delayed October release.

Despite the heavy calendar, markets have seen limited net movement. The US dollar is slightly higher overall, while the pound has managed modest gains against the euro since Thursday’s BoE meeting, pushing EUR/GBP down to around 0.875.

As ING explained, the BoE may have cut rates, but the meeting was not especially dovish and the voting split provided some support for sterling:

“Sterling drew some support from a Bank of England press release which was not as dovish as we had expected. Many of the decision makers cited the fact that expectations for wage growth remained stubbornly high and were concerned about structurally high inflation.

We suspect that these wage expectations will come down in the New Year in line with lower headline inflation. In all, we continue to expect 25bp rate cuts in February and April, compared to market pricing of just one cut. And that should mean EUR/GBP continues to find support ahead of 0.87.”

Dovish expectations had built earlier in the week following key UK data releases. The jobs report showed unemployment rising to 5.1 percent, the highest since 2021, alongside a year on year fall in payrolled employees. Vacancies continued to decline to around 729,000 in the three months to November, below pre-pandemic levels, while youth unemployment rose to its highest in over a decade.

This suggests the labour market is not just cooling but risks weakening more sharply, which could push the BoE toward a more aggressive easing cycle.

Inflation data reinforced that view. CPI fell to 3.2 percent in November from 3.6 percent in October, the lowest reading in eight months. Core inflation eased to 3.2 percent and services inflation cooled to 4.4 percent. The sharper-than-expected slowdown supports the view that inflation peaked earlier in the year and is now trending lower.

While the pound has held up well so far, the broader backdrop still points to further rate cuts in early 2026. If that plays out, sterling could come under renewed pressure once markets move beyond the year-end lull.