GBP/JPY holds gains near 192.00 as traders expect a cautious policy-easing approach by BoE
- GBP/JPY may appreciate as the BoE leans toward a gradual approach to policy easing.
- The Pound Sterling may gain ground as BoE officials support following a gradual policy-easing approach.
- The likelihood of a BoJ’s 25 basis point hike in December rose to nearly 60%, against 50% a week ago.
The GBP/JPY pair snaps its five-day losing streak, trading near 191.90 during Asian trading hours on Thursday. Economic data releases remain sparse for the United Kingdom (UK), with a similarly light calendar expected in the coming week.
As a result, the Pound Sterling (GBP) is likely to be influenced by market expectations regarding the Bank of England's (BoE) December interest rate decision. The GBP/JPY cross could find support as BoE officials lean toward a gradual approach to policy easing.
On Monday, during a speech at King’s Business School, BoE Deputy Governor Clare Lombardelli stressed the need for clearer signs of easing inflationary pressures before considering further rate cuts.
Deputy Governor Lombardelli also warned of the risks associated with inflation staying above the BoE’s target. She highlighted concerns about wage growth stabilizing at 3.5%-4.0% and the Consumer Price Index (CPI) lingering around 3% instead of the 2% target, which could present significant policy challenges.
The upside for the GBP/JPY cross may face headwinds as the Japanese Yen (JPY) finds support amid increasing expectations of another interest rate hike by the Bank of Japan (BoJ) as early as next month. Market sentiment has shifted, with the probability of a 25 basis point hike in December rising to approximately 60%, compared to around 50% just a week ago.
Additionally, BoJ Governor Kazuo Ueda recently hinted at the possibility of tightening monetary policy, highlighting concerns over the Yen's prolonged weakness. Investors are now closely watching Tokyo's inflation data, scheduled for release on Friday, as it could provide crucial clues regarding the BoJ's policy direction.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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