UK Chancellor of the Exchequer Rachel Reeves said on Wednesday she would maintain a tight rein on spending to lower inflation and borrowing costs. This eased fiscal concerns sparked by a sharp sell-off in UK government bonds. Meanwhile, strong UK services PMI data further boosted the pound, providing some support for GBP/JPY.

Rachel Reeves stressed: "Maintaining fiscal discipline is essential to reducing market volatility and controlling inflation."

The yen was under pressure from domestic political uncertainty and uncertainty about the timing of a Bank of Japan interest rate hike. Bank of Japan Deputy Governor Ryozo Himino said: "The central bank has no intention of hastily raising interest rates, which are still low."

However, Governor Kazuo Ueda noted: "If the economy and prices meet the central bank's expectations, further rate hikes are still under consideration."

The market still expects the Bank of Japan to gradually normalize policy amid continued wage growth and sticky inflation, but ambiguous signals in the short term are keeping investors on the sidelines.

Meanwhile, Bank of England Governor Andrew Bailey stated that interest rates will gradually decline in the future. The divergence in policy direction between the two central banks has become a significant factor restraining further upward movement of the GBP/JPY.

In the coming trading session, investors will focus on the UK construction PMI to further assess the resilience of the UK economy. Meanwhile, Japan's upcoming wage growth data will play a key role in shaping market expectations regarding the timing of the Bank of Japan's next interest rate hike. These two data points may serve as a bellwether for the short-term trend of the GBP/JPY pair.

From the daily chart, GBP/JPY is fluctuating around 199.00, lacking a clear sense of direction in the short term. A break above the psychological barrier of 200.00 could reopen upside potential towards 201.50. A break below 198.20 support could trigger a correction towards 197.50 or even 196.80.

Editor's opinion:

The GBP/JPY pair is currently constrained by a tug-of-war between UK economic support and uncertainty surrounding the Bank of Japan. The exchange rate is likely to remain range-bound between 198.20 and 200.00 until new data from the UK and Japan provide clear direction. In the medium term, strong Japanese wage data could reinforce expectations of an interest rate hike, driving a rebound in the yen and putting downward pressure on the GBP/JPY pair.