- GBP/JPY falls for the second day in a row amid modest JPY strength.
- Expectations of faster BoE rate cuts weaken GBP and weigh on the pair.
- BoJ uncertainty could cap the JPY and help limit spot price losses.
The GBP/JPY cross begins the new week on a weaker note and retreats further from its highest level since late July, around the 196.00 mark touched on Friday. Spot prices, however, remain confined to a familiar range held for the past two weeks or so and are currently trading around the 194.70 region, down just over 0.20% on the day.
The Japanese Yen (JPY) continues its relative outperformance for the second day in a row amid renewed fears of intervention, which in turn is seen as a key factor weighing on the GBP/JPY cross. In fact, Japan’s top currency diplomat, Atsushi Mimura, warned against speculative trading and said on Friday that authorities are watching currency market movements with a high sense of urgency. Additionally, Japan’s Deputy Chief Cabinet Secretary Kazuhiko Aoki noted that it is important for currencies to move stably reflecting economic fundamentals.
Meanwhile, a surprise drop in the UK Consumer Price Index (CPI) to the lowest level since April 2021 and below the Bank of England’s (BoE) 2% target raised expectations of a rate cut. interest rate of 25 basis points (bps) at the November 7 meeting. Additionally, money markets are pricing in the possibility of another BoE rate cut in December, acting as a headwind for the British Pound (GBP) and putting additional pressure on the GBP/JPY cross. That said, uncertainty over the Bank of Japan’s (BoJ) rate hike plans should cap the JPY and offer support to the pair.
BoJ Governor Kazuo Ueda said on Friday that the central bank should focus on the economic impact of unstable markets and risks from abroad. This adds to Japanese Prime Minister Shigeru Ishiba’s surprise opposition to further rate hikes and suggests the BoJ was in no rush to tighten policy ahead of the October 27 general election. Aside from this, improving risk sentiment should limit JPY as a safe haven and limit GBP/JPY losses, justifying caution before placing aggressive bearish bets in the absence of relevant macro data.
The BoE FAQs
The Bank of England (BoE) decides the UK’s monetary policy. Its main objective is to achieve price stability, that is, a constant inflation rate of 2%. Its instrument to achieve this is the adjustment of basic loan rates. The BoE sets the rate at which it lends to commercial banks and at which banks lend to each other, determining the level of interest rates in the wider economy. This also influences the value of the British Pound (GBP).
When inflation exceeds the Bank of England’s target, it responds by raising interest rates, which makes access to credit more expensive for citizens and companies. This is positive for the British Pound, as higher interest rates make the UK a more attractive place for global investors to invest their money. When inflation falls below target, it is a sign that economic growth is slowing, and the Bank of England will consider lowering interest rates to make credit cheaper in the hope that companies will borrow to invest in projects that generate growth, which is negative for the Pound sterling.
In extreme situations, the Bank of England can apply a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit into a clogged financial system. QE is a policy of last resort when lowering interest rates does not achieve the necessary result. The process of QE involves the Bank of England printing money to buy assets, typically government bonds or AAA-rated corporate bonds, from banks and other financial institutions. QE usually results in a weakening of the British pound.
Quantitative tightening (QT) is the reverse of QE, and is applied when the economy is strengthening and inflation begins to rise. While in QE the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage them to lend, in QT the BoE stops buying more bonds and stops reinvesting the maturing principal of the bonds that you already own. It is usually positive for the British pound.
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.
