British Pound refreshes weekly high vs broadly weaker JPY amid Mideast tensions

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GBP/JPY turns positive for the third straight day amid a combination of supporting factors.
A softer USD benefits the GBP and acts as a tailwind for spot prices amid the JPY weakness.
BoJ rate hike bets and intervention fears limit JPY losses and cap the upside for spot prices.

The GBP/JPY cross turns positive for the third straight day following an intraday dip to the 214.30-214.25 region and touches a fresh weekly high during the first half of the European session on Wednesday. Spot prices, however, lack bullish conviction and currently trade around the 214.70 area, up less than 1.10% for the day.

The Japanese Yen (JPY) continues with its relative underperformance amid worries that the economy will remain under strain due to the Middle East conflict and continued disruptions to energy supplies through the Strait of Hormuz. Furthermore, a softer US Dollar (USD) benefits the British Pound (GBP), which, in turn, is seen as another factor acting as a tailwind for the GBP/JPY cross.

The JPY bears, however, seem hesitant on the back of the growing acceptance that the Bank of Japan (BoJ) will hike interest rates at its upcoming monetary policy meeting on June 15-16. The bets were lifted by Japan's Producer Price Index (PPI), which rose in May at the fastest pace in over three years and underscored persistent cost pressures from higher energy and raw material imports.

Furthermore, speculations that Japanese authorities might step in again to prop up the domestic currency help limit deeper JPY losses. In fact, Japan’s Finance Minister Satsuki Katayama reiterated on Tuesday that the stance is unchanged and authorities are prepared for decisive measures. This, in turn, holds back traders from placing fresh bullish bets around the GBP/JPY cross and caps gains.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.