British Pound Slips as Bulls Brush Aside Hawkish BoE; Can Weak Yen Keep Downside Limited?

GBP/JPY finds it difficult to build on modest gains, with broad USD strength weighing on the GBP.
With the JPY weaker, the BoE’s hawkish position could cushion GBP losses and underpin the cross.
JPY bulls remain cautious as the timing of the BoJ’s next rate increase remains uncertain.

Fresh selling pressure pushes GBP/JPY towards the bottom of its daily range in the first half of Wednesday’s European session, following an intraday rise to the 212.15-212.20 area. The cross is now trading near 211.70. Even so, the fundamental backdrop calls for caution among traders considering aggressive bearish positions.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Pressure on the British Pound (GBP) from a broadly stronger US Dollar (USD) is restraining GBP/JPY. Supporting the dollar are expectations of more aggressive policy tightening by the Federal Reserve (Fed). The Bank of England’s (BoE) hawkish position, however, could contain further losses in the GBP. Speaking on Tuesday, BoE Deputy Governor Clare Lombardelli said additional interest rate increases remain likely, given elevated energy prices and the resilience of the UK economy.

The safe-haven Japanese Yen (JPY), meanwhile, is seen facing pressure from the prevailing appetite for risk and Tuesday’s Japanese spending data. Household Spending in Japan fell for the 10th consecutive month in September, making the Bank of Japan’s (BoJ) plans for further interest rate increases more difficult. These factors should underpin GBP/JPY, suggesting it would be prudent to await strong follow-through selling before positioning for a meaningful near-term decline.

Attention now turns to Thursday’s UK macroeconomic releases, which include the preliminary Q3 GDP reading. Until then, the supportive factors outlined above favour the possibility of buying interest emerging on dips to lower levels. Before taking fresh positions, however, bulls would need to see sustained gains and acceptance above the technically significant resistance at the 100-day Simple Moving Average (SMA), currently near the 213.00 round figure.

BoE: Key Questions Answered

What is the Bank of England’s role, and how does it affect the Pound?

Monetary policy in the United Kingdom is set by the Bank of England (BoE), whose main objective is ‘price stability’, meaning a steady inflation rate of 2%. To pursue this goal, it adjusts base lending rates. By setting the rate charged on loans to commercial banks and the rate at which banks lend to one another, the BoE determines interest rate levels across the wider economy. The value of the Pound Sterling (GBP) is also affected by these decisions.

Why do the Bank of England’s monetary policy decisions move Sterling?

Higher interest rates generally support the Pound Sterling by making the UK more attractive to global investors seeking a destination for their funds. The Bank of England raises rates when inflation exceeds its target, increasing borrowing costs for households and businesses. Conversely, below-target inflation signals that economic growth is losing momentum. In that situation, the BoE will consider cutting rates to make credit cheaper, hoping businesses will borrow to fund projects that generate growth. This is negative for the Pound Sterling.

How does Quantitative Easing (QE) work, and what does it mean for the Pound?

A weaker Pound Sterling is the usual outcome of Quantitative Easing (QE), a policy the Bank of England can introduce in extreme circumstances. Used as a last resort when interest rate cuts will not deliver the required result, QE sharply expands the flow of credit through a stalled financial system. Under this policy, the BoE prints money to purchase assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds.

How does Quantitative tightening (QT) work, and why does it affect the Pound Sterling?

The Pound Sterling usually benefits from Quantitative tightening (QT), the reverse of QE, which is introduced as the economy strengthens and inflation begins to rise. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. QT instead involves halting additional bond purchases and no longer reinvesting the principal received when bonds already held by the BoE mature.