Sterling Firms Against Yen as Markets Weigh Fiscal Risks and Policy Paths
6 min read
Share
GBP/JPY climbed back above the mid-208.00s in early Asian trade on Friday, recovering from Thursday’s mild pullback and trading near its highest levels since 2008. The cross remains well-bid as traders turn their attention to a dense run of UK data later today, including monthly GDP and Industrial Production[1], which could offer the next catalyst for sterling. The yen, meanwhile, remains under strain. Concerns over Japan’s worsening fiscal outlook, intensified by Japanese Prime Minister Sanae Takaichi’s expansive spending agenda, continue to weigh on sentiment toward the currency. A broadly risk-on tone across global equities is also dampening safe-haven demand, keeping JPY on the defensive and allowing GBP/JPY to stay elevated. Still, the downside in the yen is somewhat cushioned. Markets retain firm expectations that the Bank of Japan (BoJ) could deliver a rate hike next week[2], marking a historic shift away from negative rates. This stands in contrast to the Bank of England (BoE), where market analysts now anticipate a cut at next Thursday’s meeting[3]; an outlook that may temper the upside for GBP/JPY despite sterling’s current resilience. With both central-bank decisions and a full slate of UK macro releases[4] lined up next week[5] including labour data, Consumer Prices Index (CPI) [6] and flash PMIs, traders are likely to stay measured in their positioning. The cross remains underpinned, but further gains may require clearer conviction from the UK data cycle or a definitive signal from the BoJ. The GBP/JPY exchange rate remains elevated above 208.50 as fiscal concerns continue to weigh on the yen, while upcoming UK data and BoJ policy risks shape near-term direction.
EUR/USD weakens on US dollar rebound
EUR/USD eased toward 1.1735 in early European trade on Friday, retreating from recent peaks as the US dollar found modest support following fresh labour-market data. The pullback comes after a period of consolidation post-Federal Reserve (Fed) , with markets now weighing domestic and US indicators for direction. The US weekly Initial Jobless Claims report showed filings rose to 236,000 for the week[7] ended 6 December, exceeding expectations and marking the largest weekly increase in some time. While economists cautioned that this volatility is partly seasonal noise, the data highlighted persistent distortions in the labour market and added a nuanced dimension to rate expectations for the Fed, helping the dollar steady in early trade.
The Fed’s recent quarter-point rate cut was widely anticipated, but Chair Jerome Powell’s careful guidance has encouraged markets to reassess the pace of future easing. Policymakers’ emphasis on monitoring incoming data has tempered expectations for rapid cuts, supporting the dollar after recent weakness. [8]
On the European side, the euro remains backed by confidence that the European Central Bank’s (ECB) current stance is appropriate. ECB President Christine Lagarde reiterated that policy is “in a good place” [9] , a view echoed by Governing Council members François Villeroy de Galhau and Gediminas Šimkus.
Later today, Germany’s final Harmonised Index of Consumer Prices (HICP) reading [10] will be published. Traders will also look to additional Fed commentary for cues on the US policy path. For now, EUR/USD appears to be consolidating within a narrow range, caught between dollar stability on labour data and steady euro fundamentals. The EUR/USD exchange rate trades lower to 1.1735 as a steadier dollar meets expectations of gradual Fed easing and a stable ECB policy outlook.
Sterling steadies as Markets balance Fed caution and BoE risks
GBP/USD held near the 1.3400 handle on, consolidating at fresh near-term highs as the US dollar remained on the back foot following the Fed’s third consecutive rate cut. The pair traded in a tight range, with buyers meeting technical resistance near 1.3400 while broader sentiment stayed constructive. The Fed’s latest quarter-point reduction has reinforced risk appetite across markets, weighing on the dollar and lending support to sterling. However, Fed Chair Jerome Powell struck a cautious note, signalling that further easing is not guaranteed and that policymakers expect only limited additional cuts through 2026. That guidance briefly steadied the dollar, though markets remain sceptical and continue to price a faster pace of easing next year. US data added to the mixed tone. Weekly Initial Jobless Claims rose to 236,000, above expectations, pointing to some cooling in labour conditions, while a sharp rise in wholesale inventories did little to shift the broader outlook. Attention now turns firmly to the UK. While the remainder of this week is light, next week brings an intense run of domestic releases, including labour market data, CPI inflation, PMI surveys and the Bank of England’s policy decision [11]. UK GDP and Industrial Production figures are also due, offering early insight into growth momentum. With policy expectations finely balanced, GBP/USD may stay supported but range-bound until clarity emerges from the UK data cycle. The GBP/USD exchange rate consolidates near 1.3400 as markets balance Fed caution against rising expectations of a Bank of England rate cut.
Euro holds Upper Hand as Yen Weakens on Fiscal Unease
EUR/JPY edged higher toward 182.75 in early European trade on Friday, extending its recent advance as the Japanese yen softened further. The cross remains underpinned by concerns over Japan’s fiscal trajectory, following Japanese Prime Minister Sanae Takaichi’s expansive spending agenda, which has amplified the market’s unease around public finances and growth prospects.
That backdrop has continued to weigh on the yen, allowing the euro to retain the upper hand ahead of key events. Attention later today turns to Germany’s final HICP reading, which is expected to confirm easing inflation pressures but is unlikely to materially shift ECB expectations in the near term.
Looking ahead, markets’ focus is already building around next week’s BoJ policy meeting[12]. Analysts suggest a growing majority now expect the BoJ to raise rates[13], marking a sharp increase in confidence compared with last month. While those expectations may offer some medium-term support for the yen, it has yet to offset near-term fiscal and growth concerns.
Market research suggests the broader trend to remain constructive. The EUR/JPY pair continues to trade comfortably above its rising 100-day Exponential Moving Average (EMA), reinforcing the bullish structure. Momentum indicators remain firm, though stretched conditions suggest the pair may pause or consolidate before attempting further gains. For now, the path of least resistance remains higher, with any pullbacks likely to be viewed as corrective rather than trend-changing. The EUR/JPY exchange rate holds above 182.75 as yen weakness linked to fiscal concerns supports the cross ahead of next week’s BoJ meeting.
Stay Ahead in the Currency Game
Whether you're a daily FX trader or handle international transactions regularly, our 'Currency Pulse' newsletter delivers the news you need to make more informed decisions. Receive concise updates and in-depth insights directly in your LinkedIn feed.
Subscribe to 'Currency Pulse' now and never miss a beat in the currency markets!
Ready to act on today’s insights? Get a free quote or give us a call on: +44 (0)20 7740 0000 to connect with a dedicated portfolio manager for tailored support.
Important Disclaimer: This blog is for informational purposes only and should not be considered financial advice. Currency Solutions does not take into account the investment objectives, financial situation, or specific needs of any individual readers. We do not endorse or recommend any specific financial strategies, products, or services mentioned in this content. All information is provided “as is” without any representations or warranties, express or implied, regarding its accuracy, completeness, or timeliness.
