The pound fell back to 196 level against the yen ahead of the Bank of England's decision

The yen rebounded strongly after interest rates were kept steady, putting pressure on the pound/yen pair to pull back.

The pound/yen (GBP/JPY) fell back to around 196.15 in late Asian trading on Tuesday, after earlier touching 196.85, its highest level in nearly five months.

Following the Bank of Japan's decision to keep short-term interest rates unchanged at 0.5%, the yen gained buying support, becoming the strongest-performing major currency of the day, with a 0.16% gain against the pound. The currency strength heatmap shows that the JPY recorded gains against all G7 currencies, indicating a short-term market preference for defensive position adjustments.

The Bank of Japan's decision to maintain rates was in line with market expectations. ‘We will only tighten policy further once we are confident that core inflation will stabilise near the 2% target,’ Bank of Japan Governor Haruhiko Kuroda said previously. The central bank expects core inflation to return to the target range between the second half of 2025 and 2027.

Pound cautiously awaits UK CPI and Bank of England rate decision

For the pound, traders are focusing on the UK's May CPI data to be released on Wednesday. The market generally expects UK inflation to cool further, and if the data falls short of expectations, it will strengthen the case for the Bank of England to continue cutting rates this year.

The Bank of England will announce its interest rate decision on Thursday, with expectations that the benchmark rate will remain unchanged at 4.25%. At its May meeting, the Bank of England had previously cut the rate by 25 basis points and emphasized that future monetary policy would be ‘gradual and cautious.’

‘Weak core inflation in the UK and recent slowing wage growth may prompt the Bank of England to cut rates again in the third quarter.’ — —According to market survey analysis

From a technical chart perspective, GBP/JPY has pulled back after approaching the key resistance level of 197.00, forming a minor ‘double top’ pattern in the short term. If the exchange rate breaks below the 196.00 psychological support level, it may further retreat to the 195.40 and 195.00 regions.

Conversely, if the pound is boosted by CPI data or the central bank's interest rate statement and the exchange rate re-breaks above 196.85, it could open up upside potential toward the previous high of 198.00. The exchange rate remains in an uptrend, but short-term correction risks should be approached with caution.

The current GBP/JPY trend has entered a policy-driven phase. The yen is supported by the Bank of Japan's signals of maintaining stability, while the pound is temporarily on hold due to expectations of declining inflation.

Technical indicators show that the upward trend remains intact, but the market may continue to consolidate at elevated levels ahead of the Bank of England's interest rate decision. Investors are advised to monitor whether the key support level at 196.00 holds and the substantive impact of Wednesday's CPI data on pound sentiment.