British Pound flat below 217.00 as JPY intervention risks cap gains; bullish bias intact

GBP/JPY lacks a firm intraday direction on Tuesday, though the downside remains cushioned.
Intervention risks support the JPY and cap the cross as a wide UK-Japan rate gap acts as a tailwind.
The JPY bulls remain on the back foot amid economic risks stemming from the Mideast crisis.

Haresh Menghani FXStreet

The GBP/JPY cross struggles to gain any meaningful traction and seesaws between tepid gains/minor losses through the early part of the European session on Tuesday. Spot prices remain confined within the previous day's range and currently trade just below the 217.00 mark, nearly unchanged for the day.

Traders remain on high alert amid speculations that Japanese authorities will step in to prop up the domestic currency. Adding to this, Japan's Finance Minister, Satsuki Katayama, said that a change to the Government Pension Investment Fund (GPIF) asset allocation could be examined if the investment environment shifts sharply. This, in turn, offers some support to the Japanese Yen (JPY) and turns out to be a key factor acting as a headwind for the GBP/JPY cross.

However, persistently wide interest rate differential between Japan and other major economies, including the UK, holds back the JPY bulls from placing aggressive bets. In fact, the Bank of Japan (BoJ) raised its policy rate in June to 1% or, the highest level since 1995, and the Bank of England's (BoE) base rate is at 3.75%, leaving a rate differential of around 275 basis points (bps). This keeps the so-called JPY carry trade active and limits the downside for the GBP/JPY cross.

Meanwhile, a further escalation of tensions between the US and Iran, along with the closure of the critical Strait of Hormuz, adds to economic concerns amid Japan’s heavy reliance on imported oil from the Middle East. Furthermore, a softer US Dollar (USD) benefits the British Pound (GBP) amid easing UK political uncertainty and hawkish BoE bets, which backs the case for the resumption of the GBP/JPY pair's upward trajectory witnessed over the past three weeks or so.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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