GBP/JPY remains on the defensive below 198.00 amid expectations for BoJ rate hike
- GBP/JPY trades in negative territory for the sixth consecutive day near 197.75 in Friday’s early European session.
- The increase in Japan’s Tokyo core CPI inflation maintains the possibility of a BoJ rate hike next week.
- The BoE is expected to cut its interest rate by 25 bps next week.
The GBP/JPY cross loses ground around 197.75 during the early European session on Friday. The Japanese Yen (JPY) edges higher as traders potentially unwind their carry trades ahead of the Bank of Japan's (BoJ) monetary policy meeting next week.
Data released by the Statistics Bureau of Japan on Friday revealed that the headline Japan’s Tokyo Consumer Price Index (CPI) increased 2.2% YoY in July, compared to a 2.3% rise in June. Meanwhile, Tokyo CPI ex Fresh Food rose 2.2% in July versus 2.1% prior and was in line with the market consensus. This figure registered the third straight month of re-acceleration after a decline of 1.6% year on year in April.
Japan’s Tokyo CPI inflation reports support the case of a BoJ rate hike next week, which has lifted the JPY against the GBP. Financial markets are now pricing in a 38% probability of a 15 basis points (bps) hike.
Furthermore, the fear of further foreign exchange (FX) intervention from the Japanese authorities might continue to underpin the Japanese Yen and create a headwind for EUR/JPY. Early Friday, Japan's top currency diplomat, Masato Kanda said that excessive FX volatility has a negative impact on the Japanese economy, adding that he will closely monitor the economy and implement necessary measures if necessary.
On the GBP’s front, the rising expectation that the Bank of England (BoE) would cut interest rates at its upcoming policy meeting on August 1 weighs on the Cable. As per UBS analysts, the BoE is expected to lower its interest rates by 25 basis points (bps) in early August, followed by another 25 bps in November, reducing the rate to 4.75% by the end of 2024.
Japanese Yen FAQs
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.
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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against 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.
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