The British pound reached its highest level against the Japanese yen since 2008 on Friday, as traders reacted to the Bank of Japan (BoJ) rate hike while largely overlooking the interest rate divergence between the UK and Japan. Meanwhile, sterling remained steady against the U.S. dollar and the euro, following an expected rate cut by the Bank of England (BoE).

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Pound Performance Across Major Currencies

Sterling showed mixed performance across key currency pairs:

• Against the yen: The pound surged nearly 0.8% to 209.75 yen, marking its highest level since August 2008. The rally was driven by profit-taking from positions accumulated ahead of the BoJ’s decision to raise rates.
• Against the U.S. dollar: Sterling was largely flat at $1.3378.
• Against the euro: The pound fell slightly to 87.55 pence.

The strength against the yen contrasts with traditional expectations, as interest rate gaps between the BoE and BoJ have narrowed to their lowest level in four years. Normally, a narrowing gap would support the yen, but traders are currently more focused on Japan’s long-term fiscal challenges than on short-term yields.

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Bank of England Rate Decision

On Thursday, the BoE cut interest rates by 25 basis points, as widely expected. However, the narrow vote indicated that not all policymakers favored further easing. Governor Andrew Bailey highlighted that while the overall direction of rates may be downward, future cuts could come at a slower pace due to persistently high inflation—the highest among the G7 economies.

ING strategist Chris Turner noted that sterling’s recent gains are partly supported by the BoE’s cautious stance on additional rate cuts. “Policymakers are flagging wage growth and overall inflation as stubbornly high,” Turner said. Nevertheless, he cautioned that the pound’s strength may be temporary, as wage expectations and headline inflation are expected to decline in the coming months.

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Market Expectations and Outlook

Market participants are pricing in at least one more BoE rate cut by June 2026, with about a 50% chance of a second cut by year-end, potentially bringing the base rate down to 3.25%, its lowest since late 2022.

Analysts suggest that euro/sterling may continue to find support above 0.87 in the near term, but sterling bulls should remain cautious amid the expected easing trajectory.

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Conclusion

Sterling’s surge against the yen reflects a mix of profit-taking, BoJ policy moves, and short-term market dynamics, while its stability against the dollar and euro underscores the BoE’s cautious monetary approach. As global investors navigate divergent central bank policies, inflation pressures, and currency volatility, the pound is likely to remain under close scrutiny in early 2026.