GBP/JPY steadies above 205.00 with all eyes on UK budget

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The Pound has ticked up from Friday’s lows at 204.30, but it is struggling to find significant acceptance above the 205.00 level on Monday, despite the positive risk sentiment.

The Pound stalls below 205.50 against a weak Japanese Yen.
Investors remain wary of placing large GBP longs with the UK budget in focus.
The JPY remains offered despite growing speculation of a BoJ intervention.

The Pound has ticked up from Friday’s lows at 204.30, but it is struggling to find significant acceptance above the 205.00 level on Monday, despite the positive risk sentiment. Investors’ cautiousness ahead of the release of the UK budget and growing speculation of a BoJ intervention have left the pair looking for direction.

In the UK, all eyes are on the Autumn Budget, which will be released next Wednesday. Chancellor Rachel Reaves hinted at increasing the Income Tax rises weeks ago before stepping back. Wednesday’s budget, however, is highly likely to deliver significant tax rises to tackle the country’s increasing fiscal deficit.

This has boosted the Bank of England, which will be forced to ease interest rates in the coming months ot offsett the economic impact of higher taxes. Beyond that, recent UK macroeconomic figures have shown figures consistent with a steep economic slowdown, strengthening the case for an upcoming BoE rate cut.

Takaichi's fiscal largesse weighs on the Yen

The Japanese Yen, in turn, has been unable to draw significant support from the Pound’s weakness, weighed by flaws of its own. Prime Minister Takaichi’s cabinet approved last week a 21 trillion Yen (USD 135 billion) stimulus program, which has boosted concerns about the already strained public finances.

Yen weakness prompted Japanese authorities to ramp up their rhetoric against excessive FX volatility, issuing a rather explicit intervention warning last Friday. Investors, however, remain selling the JPY on Monday, hopeful that the BoJ will wait until the end of the week to step in. The bank normally intervenes when trading volumes are light, aiming to trigger the maximum impact, and the Thanksgiving holiday in the US, due on Thursday, offers a great opportunity.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.

How do the decisions of the Bank of Japan impact the Japanese Yen?

One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.

How does broader risk sentiment impact the Japanese Yen?

The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.