GBP/JPY finds interim support near 188.60, downside remains favored on hawkish BoJ bets

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• GBP/JPY finds an intermediate support near 188.60. More downside likely on BoJ rate hike bets.
• BoJ policymakers see a positive cycle for wage growth, able to keep inflation above 2%.
• The Pound Sterling will be guided by the UK’s labor market data, scheduled for next week.

The GBP/JPY pair discovers temporary support near 188.60 after sharply correcting from 191.00 in the last three trading sessions. The asset is expected to witness more downside as market expectations for the Bank of Japan (BoJ) abandoning negative interest rates have improved.

A few BoJ policymakers expect a positive cycle in wage growth, improving the odds of inflation remaining above the 2% target sustainable. The BoJ had been reluctant to exit the expansionary policy stance as policymakers were not convinced that wage growth would continue to grow steadily. Investors hope the BoJ will shift to policy normalization in the March monetary policy meeting.

The Japanese Yen would witness strong buying interest if the BoJ delivers a hawkish interest rate decision, as its monetary policy has remained extremely dovish for more than a decade.

Meanwhile, the Pound Sterling awaits fresh guidance on interest rates. The United Kingdom's economic calendar remained light this week. Going forward, investors will focus on the labor market data for three months ending in January, which will be published early next week. Investors will keenly focus on the Average Earnings data, which will provide a fresh outlook on inflation.

The UK’s wage growth has remained almost double what is required to be consistent with the return of inflation to 2%. Strong wage growth momentum would dampen market expectations for rate cuts, which could result in higher investment in the Pound Sterling.