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September's recovery has room to run while the Bank of England hikes and the Bank of Japan holds.
The Japanese yen has handed back more than four yen to the pound since September as the Bank of Japan settles into a hold on 30 October and the Bank of England moves towards a rate rise to 4% in November.
The pound-to-yen exchange rate's recovery is now closing on the 100-day moving average at 213.47, the medium-term trend marker that has capped every attempt higher since the September break.
Above: GBP/JPY daily chart with the 100-day moving average and the 207.00 support line. Chart courtesy of TradingView.
Pound-yen is at 211.08 at the time of writing, up from September's low at the 207.00 support line, which held again when it was retested at the start of October, with Tuesday's trade confined to a tight 210.79 to 211.25 range.
That average is itself falling, down from around 215 in September, so GBP/JPY does not need to cover the full 1.1% gap to meet it.
Tuesday's gains follow a better-than-expected UK labour market report, which showed the unemployment rate falling to 4.7% from 4.9% and private-sector average earnings ticking up to 3.0%.
"With oil prices climbing to the highest levels since May, there is little that will stop the BoE from raising rates in November to 4%," says Societe Generale.
Brent has reached $111.2 a barrel, the highest since 20 May, which hardens the inflation case the committee's hawks have been putting.
Money markets attach a 93% probability to a November move, which leaves the hike in the price and puts sterling's next leg in the hands of flow rather than further rate repricing.
With November all but settled, the debate runs to what follows, where a widely held view holds that the Bank will not deliver the full extent of what is priced beyond it.
"In our view, the BOE may not need to tighten as much as markets anticipate, which is a drag on GBP. The UK economy is operating below capacity, the policy rate is near the top of the BOE's estimated 2% to 4% neutral range, and fiscal policy will likely turn more restrictive following the October 28 UK budget," says Brown Brothers Harriman.
Positioning is turning supportive of sterling on the build-up of CFTC shorts, which Societe Generale judges to have gone too far, leaving scope for a covering rally once the 28 October Budget clears.
That covering rally can help carry GBP/JPY to the 100-day average, and the rate path beyond November decides whether it can hold above it.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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Talk to a specialistThe Bank of Japan is Not Going on 30 October
Turning to Tokyo, the repricing that drove September's yen spike has unwound.
Markets price less than 5% odds of a hike at the 30 October meeting, with the policy rate at 1.25%.
"In our view, back-to-back BoJ rate hikes were always unlikely, despite the early September warning of possible sequential hikes from Hajime Takata, the BoJ's most hawkish voter," says CIBC.
ANZ expects 25 basis point increases in December and March, and nothing beyond that.
"Based on our assessment of growth drivers and our forecast outlook, we do not think a more aggressive tightening in policy will be warranted," says ANZ.
Carry has resumed in the gap, leaving the yen the weakest G10 currency on Monday as dollar-yen rose 0.3% to 158.50.
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Deutsche Bank's G10 spot desk favours the yen as one of the cleaner defensive trades available, and judges the dollar to have peaked on stretched positioning.
A dollar that has topped pulls dollar-yen lower from 158.50 and strips out the arithmetic holding GBP/JPY up, since sterling's own gains against the dollar have been the smaller half of the cross's recovery.
213.47 settles it: the pound needs a daily close above the 100-day average to turn September's decline into a base, and failure there returns GBP/JPY to the 207.00 support line into the Budget.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
