GBP/JPY struggles to capitalize on modest intraday uptick, flat lines below mid-212.00s

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The GBP/JPY cross attracts some dip-buyers near the 211.85 region during the Asian session on Monday, though it lacks follow-through and remains confined in a range held over the past week or so.

GBP/JPY fills the weekly bearish gap opening on Monday, though it lacks follow-through buying.
A firmer USD weighs on the GBP, while geopolitical risks and intervention fears benefit the JPY.
Hawkish BoJ and BoE policy outlooks hold back traders from placing aggressive directional bets.

The GBP/JPY cross attracts some dip-buyers near the 211.85 region during the Asian session on Monday, though it lacks follow-through and remains confined in a range held over the past week or so. Spot prices currently trade just below mid-212.00s, nearly unchanged for the day amid mixed fundamental cues.

The British Pound (GBP) is pressured by a modest US Dollar (USD) strength, while rising tensions in the Middle East benefit the Japanese Yen's (JPY) safe-haven status. Apart from this, speculations that Japanese authorities would step in to stem further JPY weakness act as a headwind for the GBP/JPY cross. In fact, Japan’s top foreign exchange official and Vice Finance Minister for International Affairs, Atsushi Mimura, said earlier today that the government will consider taking measures on all fronts to contain FX volatility.

Meanwhile, the Bank of Japan (BoJ) maintained its bias toward monetary policy normalization at the end of the March meeting last week and warned that surging Crude Oil prices driven by the Middle East conflict could exacerbate inflationary pressures. The Bank of England (BoE), on the other hand, signaled the potential interest rate hike as early as April due to inflation concerns stemming from the Iran war. This, in turn, holds back traders from placing directional bets around the GBP/JPY cross and leads to range-bound price action.

Hence, it will be prudent to wait for strong follow-through buying before positioning for an extension of the recent bounce from a technically significant 100-day Simple Moving Average (SMA), around the 207.25 area, or the year-to-date low set in February. In the absence of any relevant market-moving economic data, either from Japan or the UK, fresh developments surrounding the ongoing conflicts in the Middle East will play a key role in influencing the broader risk sentiment and providing some impetus to the GBP/JPY cross.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.