British Pound gains as UK assures fiscal discipline

The British Pound (GBP) trades higher against its major currency peers, except antipodeans, on Wednesday. In the early European trade, the British currency is up 0.2% at around 210.12 against the Japanese Yen (JPY).

The Pound Sterling attracts bids as United Kingdom (UK) Chancellor of the Exchequer John Healey vows to fund cost-of-living support package through higher taxes or reductions in public spending rather than additional borrowing, Financial Times.

UK’s plegde to maintain fiscal discipline ahead of budget announcement on October 28 could cap rallying yields on UK gilt securities, which have participated in global yields rally. On Tuesday, 10-year UK Gilt Yields rose to near 5.45% after a weak opening.

Meanwhile, investors await monthly Gross Domestic Product (GDP) data for August, which is scheduled for Thursday. The UK economy is expected to have contracted by 0.1% after expanding at a 0.4% pace in July. Along with, investors will also focus on the Manufacturing and Industrial Production data for August.

On the monetary policy front, traders seem confident that the Bank of England (BoE) will deliver its first interest rate hike of this year in the November meeting.

BoE policymaker Megan Greene has also advocated for an interest rate hike, warning that the impact of energy supply shock could start feeding into broader prices and wages.

Greene warns on inflation risks, supports stronger GBP

FXS Speechtracker scores Greene at 8.2, above the historic 7.7 baseline, signaling a more hawkish tilt than usual. Emphasis that "it will be too late" if the MPC waits for second-round effects, and that the bigger risk is not being proactive enough in tackling inflation, points to a bias toward further tightening that is supportive for GBP.

Greene’s comment that UK monetary policy is "not that restrictive" reinforces scope for additional rate hikes despite recent growth concerns. A lack of surprise at the latest IMF forecasts suggests confidence in the current macro narrative, which, combined with the proactive stance on inflation, should underpin GBP on expectations that the BANK OF ENGLAND will keep policy relatively firm.

On Tokyo front, the Japanese Yen underperforms its peers as market experts doubt that the Bank of Japan (BoJ) will hike interest rates in the October meeting too.

BoJ seen shifting to inflation stabilisation but not yet ready for rapid hikes

Analysts at Rabobank argue that the Bank of Japan has reached an important inflection point, noting that “it now appears to have reached the point when it can instead shift its focus to stabilising price pressures around the target level.” However, they caution that this does not herald an aggressive tightening cycle, stressing that “even so, the Bank is still not widely viewed as being in a position in which back-to-back rate rises are appropriate.”