• GBP/JPY drops to the mid-207.00s, drawing closer to YTD lows at 207.10.
• The Yen rallies as BoJ tightening hopes offset concerns about higher Oil prices.
• Dovish comments by BoE Bailey capped Pound’s recovery attempts on Tuesday.

The British Pound (GBP) extends losses on Wednesday as the Japanese Yen (JPY) rallies across the board, with investors bracing for a quarter-point rate hike by the Bank of Japan (BoJ) at next week’s monetary policy meeting. The GBP/JPY’s rebound from year-to-date lows at 207.10 was capped at the 209.00 area on Tuesday, and the pair retreated again on Wednesday, hitting session lows near 207.50 at the London session opening.

Higher Crude prices, a traditional headwind for Yen rallies, have failed to dent JPY’s recovery. Brent oil is ticking down on Wednesday but remains near its highest levels in the last two months at $97.00, as the conflict in the Middle East widens, threatening to escalate into a full regional war.

BoJ shift could force rethink of entrenched carry trade assumptions

Strategists at Rabobank observe September’s BoJ policy meeting as pivotal for global funding dynamics. If the BoJ “supports the view that it may be embarking on a more rapid pace of rate rises in the coming months,” then “the market will have to re-examine some long-standing assumptions regarding the carry trade,” say Rabobank analysts in a note.

In their view, any clear signal of a faster BoJ hiking trajectory would challenge the durability of using the Yen as a low-cost funding currency and could prompt investors to reassess established positioning built up over years of ultra-loose Japanese policy.

In the UK, the Bank of England (BoE) Governor, Andrew Bailey, acknowledged on Tuesday that inflation risks “are on the upside,” but he also vowed to dispel the idea that rate hikes are inevitable, and that monetary policy decisions will depend on economic and geopolitical developments. The Pound dropped against most peers following Bailey’s comments.