Pound rises on UK jobs data, yen near 7-month high as BOJ decision looms

LONDON/SINGAPORE, Jan 17 (Reuters) – The pound rose slightly on Tuesday after data showed the pace of wage growth in Britain, closely watched by the Bank of England as it assesses how much to raise interest rates, accelerated again.

The yen was perched near seven-month highs as investors held their breath for a possible policy change at the Bank of Japan (BOJ).

The pound rose 0.2% to $1.2218 after data showed wage growth accelerated in the three months to November, while employment rose faster than expected by 27,000.

“Official data showing that employment conditions have held up better than expected should be taken with a grain of salt,” said Simon Harvey, head of currency analysis at Monex Europe.

“The BoE is unlikely to count its chickens before they have hatched.”

BoE Governor Andrew Bailey said on Monday that a shortage of workers in the labor market posed a major risk to forecasts of inflation falling from current levels above 10%.

FX strategists at ING and Monex Europe said it was too early to rule out the risk of another 50 basis point interest rate hike in February as the BoE is set to raise rates for the 10th time consecutive.

EYES ON BOJ

The yen stabilized around 128.72, down 0.17% against the US dollar after hitting a late-May high of 127.22 to the dollar on Monday. Options trading shows a market primed for sharp moves when the BOJ wraps up a two-day meeting on Wednesday, with overnight implied volatility hitting a six-year high.

Speculation is mounting over a change or end to Japan’s yield curve control policy as the market pushed 10-year yields above a BOJ-set cap of 0.5% and that the amount of bond purchases to defend it becomes staggering.

A newspaper article last week also stoked expectations of a change, so traders are on the lookout for a backlash even if the BOJ doesn’t budge.

“The market ran pretty hard with this story and is looking for a follow-up,” said IG Markets analyst Tony Sycamore.

He sees three main possibilities: no change in policy, an adjustment similar to a decision made in December to widen the target yield range to 10 years and the complete abandonment of control of the yield curve, the latter likely to cause the most extreme response on the market.

Elsewhere, the US dollar index rebounded from a seven-month low of 101.77 hit on Monday and held steady at 102.4, up 0.1%. The euro stabilized at $1.0819.

There was not much reaction from the FX market to the much stronger than expected Chinese growth data. The yuan last traded down 0.6% to 6.7760 to the dollar.

Reporting by Joice Alves in London and Tom Westbrook in Singapore; Editing by Angus MacSwan

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