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• GBP/JPY appreciates despite a dampened market sentiment amid US-China trade tensions.
• China retaliated by slapping a 15% tariff on US coal and LNG imports; and an additional 10% tariff on crude Oil.
• The JPY could gain ground due to rising odds of further BoJ’s rate hikes.

The GBP/JPY cross reaches back to near 193.00 during the European session on Tuesday after recovering its daily losses. The cross gained support as investor confidence improved following US President Donald Trump’s decision to delay tariff plans on Canada and Mexico, weakening demand for the safe-haven Japanese Yen (JPY).

However, the upside for GBP/JPY is capped, as signs of uncertainty and escalating US-China trade tensions could have driven safe-haven flows toward the JPY. This follows China's finance ministry imposing tariffs on US goods—including crude oil, farm equipment, and automobiles—in immediate retaliation to Trump's 10% tariff on Chinese imports.

However, expectations of further rate hikes by the Bank of Japan (BoJ) could attract buyers. The BoJ’s Summary of Opinions indicates policymakers discussed the potential for additional rate increases, reinforced by Tokyo’s core inflation rising at its fastest annual pace in nearly a year. This strengthens the case for further BoJ policy tightening, offering some support to the JPY.

The GBP/JPY cross may depreciate as the Pound Sterling (GBP) may face risks due to expectations that the Bank of England (BoE) will restart its policy-easing cycle, likely cutting interest rates by 25 basis points (bps) to 4.5% on Thursday.

Traders anticipate a dovish stance from the Bank of England amid signs of slowing inflation, despite accelerating wage growth in the United Kingdom (UK). The BoE’s Monetary Policy Committee (MPC) is expected to vote 8-1 in favor of a quarter-point rate cut to 4.5%, with one member likely advocating for maintaining current rates for another meeting.

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