British Pound bulls seem hesitant as intervention fears and hawkish BoJ bets support Yen
- GBP/JPY struggles to gain any meaningful traction, though the downside remains cushioned.
- Intervention fears and hawkish BoJ rhetoric support the JPY, capping the upside for the cross.
- The wide UK-Japan rate differential favors bullish traders and acts as a tailwind for spot prices.
The GBP/JPY cross extends its directionless price moves through the early European session on Thursday, though it holds above the weekly low and currently trades around the 218.15-218.20 region. Speculations that Japanese authorities will step in to prop up the domestic currency act as a headwind for spot prices, though the supportive fundamental backdrop favors bullish traders.
Japan's Finance Minister Satsuki Katayama reiterated that the government was ready to take decisive action on foreign exchange as needed. Furthermore, reports on Thursday indicated that Bank of Japan (BoJ) officials are open to raising interest rates at a faster pace, offering additional support to the Japanese Yen (JPY). The British Pound (GBP), on the other hand, remains on the defensive on the back of Wednesday's mixed UK inflation figures, which further contributes to capping the GBP/JPY cross.
The downside, however, remains cushioned in the wake of a stark contrast in monetary policy between Japan and the rest of the world. In fact, borrowing costs in Japan remain exceptionally low relative to other major economies, including the UK. The Bank of Japan (BoJ) has cautiously started to normalize policy and lifted the short-term policy rate in June to 1.00%, or the highest since 1995. The Bank of England's (BoE) base rate is at 3.75%, leaving an interest rate differential of around 275 basis points (bps).
This keeps the so-called carry trade active, which has been a key factor behind the JPY's relative underperformance. Adding to this, investors remain worried that Japan’s economy remains vulnerable to a global energy supply chain shock amid a significant fall in shipping traffic through the Strait of Hormuz due to escalating US-Iran tensions. This, in turn, favors JPY bears, suggesting that any corrective pullback in the GBP/JPY cross could be seen as a buying opportunity and is more likely to remain limited.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
