British Pound retreats despite hawkish BoE; weak Yen appears to limit downside

Broad USD strength weighs on GBP, leaving GBP/JPY unable to build on a modest advance.
With JPY softer, the BoE’s hawkish position could cushion GBP declines and underpin the cross.
JPY bulls remain cautious as the timing of the next BoJ rate increase stays uncertain.

GBP/JPY is trading near 211.70. Fresh selling emerged after Wednesday’s intraday rise to the 212.15-212.20 area, pushing the cross towards the bottom of its daily range in the first half of the European session. However, the fundamental backdrop calls for caution over aggressive bearish positions.

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

Expectations of more aggressive policy tightening by the Federal Reserve (Fed) are supporting broad US Dollar (USD) strength. That is weighing on the British Pound (GBP) and, in turn, restraining GBP/JPY. The Bank of England’s (BoE) hawkish position could nevertheless contain further GBP losses. Speaking on Tuesday, BoE Deputy Governor Clare Lombardelli said additional interest rate rises remain likely, citing high energy prices and the resilience of the UK economy.

September marked the 10th consecutive monthly decline in Japan’s Household Spending, according to figures published on Tuesday. The weakness complicates the Bank of Japan’s (BoJ) plans to raise interest rates further. Together with the prevailing appetite for risk, this is seen as weighing on the safe-haven Japanese Yen (JPY) and should underpin GBP/JPY. Positioning for a material near-term decline would therefore warrant waiting for strong follow-through selling.

Thursday’s batch of UK economic releases, including the preliminary Q3 GDP reading, is the next focus for traders. Until then, the supportive factors outlined above favour the prospect of buying on dips at lower levels. Before taking fresh positions, however, bulls would need sustained gains and acceptance above resistance at the technically significant 100-day Simple Moving Average (SMA), now near the 213.00 round-number level.

BoE: Key Questions

Bank of England: Its Role and Impact on the Pound

A steady inflation rate of 2% is the Bank of England’s (BoE) primary objective. Known as ‘price stability’, this goal guides its monetary policy decisions for the United Kingdom. The BoE pursues it by adjusting base lending rates. It determines the rate charged on its loans to commercial banks and on lending between banks, shaping interest rates across the wider economy. These decisions also affect the value of the Pound Sterling (GBP).

BoE Monetary Policy: The Effect on Sterling

Inflation above the Bank of England’s target prompts interest rate increases, raising borrowing costs for households and businesses. Higher rates make the UK more attractive to international investors seeking a place for their funds, supporting the Pound Sterling. By contrast, below-target inflation signals slower economic growth. The BoE will then consider cutting rates to reduce the cost of credit, hoping businesses borrow to fund projects that generate growth. This is negative for the Pound Sterling.

Quantitative Easing (QE): How It Works and Affects the Pound

When rate cuts cannot deliver the required outcome, the Bank of England can turn to Quantitative Easing (QE) as a last resort in extreme circumstances. The policy substantially expands the flow of credit through a stalled financial system. To implement QE, the BoE prints money and uses it to purchase assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The Pound Sterling usually weakens as a result.

Quantitative Tightening (QT): The Mechanism and Sterling Impact

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. QT instead ends further bond purchases and the reinvestment of principal repaid when existing bond holdings mature. The policy is generally positive for the Pound Sterling.