- GBP/JPY regains positive traction on Wednesday, although it lacks buying follow-through.
- Uncertainty over the BoJ rate hike weakens the JPY and lends some support to the pair.
- Geopolitical risk helps limit JPY’s deeper losses and keeps further gains at bay for the pair.
The GBP/JPY cross attracts some dip buying during the Asian session on Wednesday and reverses some of the previous day’s losses. Spot prices, however, remain below the technically significant 200-day SMA and are currently trading around the 191.00 level, up less than 0.15% on the day.
The Japanese Yen (JPY) remains weakened by uncertainty over further interest rate hikes by the Bank of Japan (BoJ), which in turn is seen as a key factor lending some support to the GBP/JPY cross. Indeed, Japan’s new Prime Minister Shigeru Ishiba said earlier this week that the BoJ’s monetary policy must remain accommodative to sustain a fragile economic recovery. Additionally, Ishiba seeks to secure a national mandate with a snap election on October 27, fueling political uncertainty and putting additional pressure on the JPY.
That said, fears of an all-out war in the Middle East intensified further after Iran launched more than 200 ballistic missiles at Israel on Tuesday. This, in turn, tempers investor appetite for riskier assets, which is evident by a generally weaker tone in global stock markets and should help limit deeper losses for the safe-haven JPY. Additionally, markets are pricing in another BoJ rate hike later this year. This marks a large divergence compared to expectations of further rate cuts from the Bank of England (BoE) and should cap the GBP/JPY cross.
In the absence of relevant market-moving economic releases on Wednesday, the aforementioned fundamental background justifies caution before opening new bullish positions on the currency pair. Even from a technical perspective, the 50-day SMA crossed below the 200-day SMA last month, forming a ‘Death Cross’ on the daily chart. Furthermore, the GBP/JPY cross has repeatedly failed to find acceptance above the 200-day SMA. Therefore, a strong buying trail is needed to support the prospects of a further bullish move.
The Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets the country’s monetary policy. Its mandate is to issue banknotes and carry out monetary and currency control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked on ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low inflation environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing of banknotes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further relaxed policy by first introducing negative interest rates and then directly controlling the yield on its 10-year government bonds.
The Bank of Japan’s massive stimulus has caused the Yen to depreciate against its major currency pairs. This process has been exacerbated more recently by a growing policy divergence between the Bank of Japan and other major central banks, which have opted to sharply raise interest rates to combat inflation levels that have been at record highs for decades. The Bank of Japan’s policy of keeping rates low has caused the differential with other currencies to increase, dragging down the value of the Yen.
The weakness of the Yen and the rebound in global energy prices have caused a rise in Japanese inflation, which has exceeded the 2% target set by the Bank of Japan. Even so, the Bank of Japan judges that sustainable and stable achievement of the 2% objective is still not in sight, so a sudden change in current monetary policy seems unlikely.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
