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• GBP/JPY inches lower as traders expect the BoJ to deliver more rate hikes in the future.
• BoJ reiterated its commitment to further rate hikes if the outlook presented at the January meeting unfolds as expected.
• The Pound Sterling faces challenges due to the potential risk of stagflation in the UK economy.

GBP/JPY surrenders its recent gains from the previous session, trading around 193.30 during the European hours on Wednesday. The Japanese Yen (JPY) strengthened against its peers amid increasing expectations that the Bank of Japan (BoJ) will continue raising interest rates. Minutes of the December Bank of Japan meeting released this Wednesday showed that members emphasized the need for cautious monetary policy adjustments.

Meanwhile, investors are more confident that the BoJ will continue its move toward normalization and deliver additional interest rate hikes in 2025. Last week, the BoJ reaffirmed its commitment to further rate hikes and adjustments to its monetary policy stance if the outlook presented at the January meeting unfolds as expected.

Further downside risks of the GBP/JPY cross seem possible as the Pound Sterling (GBP) could face challenges due to the increased likelihood of the risk of stagflation in the UK economy, driven by weakening labor demand and persistent inflation.

Traders are currently pricing in a 25 basis point (bps) rate cut in the Bank of England’s (BoE) first monetary policy decision of 2025 on February 6, which would bring borrowing rates down to 4.5% amid the sluggish economic outlook.

On Tuesday, UK Prime Minister Keir Starmer gave optimistic remarks on the economy in a Bloomberg interview. Starmer emphasized that the Labour government’s top priority is "growth" and noted that the economy is beginning to "turn around." He also highlighted the strong trade ties between the United States (US) and the UK, stating that "we’ve got a huge amount of trade with the United States already, and the base is there for even better trading relations. We need to build on that."

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