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British Pound retreats further from multi-year top vs JPY as Tokyo intervention risks loom

  • GBP/JPY attracts sellers for the second straight day as intervention fears boost the JPY.
  • A modest USD strength weighs on the GBP, contributing to the pair’s intraday downfall.
  • The wide UK-Japan rate gap and optimism over the UK’s fiscal outlook should limit losses.

The GBP/JPY cross turns lower for the second straight day following an intraday uptick to the 219.00 neighborhood on Friday and retreats further from its highest level since January 2008, touched earlier this week. Spot prices weaken below mid-218.00s during the early part of the European session, though the downside potential seems limited.

Traders remain on high alert amid speculations that Japanese authorities will step in to prop up the domestic currency, which, in turn, offers some support to the Japanese Yen (JPY). The British Pound (GBP), on the other hand, is weighed down by a modest US Dollar (USD) strength and turns out to be another factor exerting some pressure on the GBP/JPY cross. However, a broadly supportive fundamental backdrop could limit deeper losses, warranting caution for aggressive bearish traders.

Borrowing costs in Japan remain significantly lower than in other major economies, including the UK. In fact, the Bank of Japan (BoJ) raised its short-term policy rate to a 31-year high level of 1.0% in June, while the Bank of England's (BoE) base rate is 3.75%. This leaves a gap of around 275 basis points (bps), which is wide enough to sustain the so-called JPY carry trades. Furthermore, economic risks stemming from the Middle East conflict might cap the JPY recovery and support the GBP/JPY cross.

Meanwhile, diminishing domestic political risks, along with the growing optimism over the UK’s fiscal outlook and economic resilience, should help limit losses for the GBP and the GBP/JPY cross. Reports that the  incoming UK Prime Minister, Andy Burnham, may appoint Shabana Mahmood as Chancellor eased concerns over aggressive government borrowing and heavy fiscal expansion. Moreover, data released on Thursday showed that the UK economy returned to growth in May.

Hence, it will be prudent to wait for strong follow-through selling before confirming that the GBP/JPY cross has topped out in the near-term and positioning for a meaningful corrective decline. Nevertheless, spot prices remain on track to register strong weekly gains, and any subsequent fall might still be seen as a buying opportunity.

Pound Sterling Price This week

The table below shows the percentage change of British Pound (GBP) against listed major currencies this week. British Pound was the strongest against the Japanese Yen.

USDEURGBPJPYCADAUDNZDCHF
USD-0.39%-0.53%0.31%-0.92%-0.56%-1.39%-0.08%
EUR0.39%-0.15%0.72%-0.54%-0.23%-1.01%0.32%
GBP0.53%0.15%0.81%-0.38%-0.08%-0.86%0.51%
JPY-0.31%-0.72%-0.81%-1.31%-0.88%-1.74%-0.44%
CAD0.92%0.54%0.38%1.31%0.44%-0.44%0.90%
AUD0.56%0.23%0.08%0.88%-0.44%-0.78%0.45%
NZD1.39%1.01%0.86%1.74%0.44%0.78%1.39%
CHF0.08%-0.32%-0.51%0.44%-0.90%-0.45%-1.39%

The heat map shows percentage changes of major currencies against each other. The base currency is picked from the left column, while the quote currency is picked from the top row. For example, if you pick the British Pound from the left column and move along the horizontal line to the US Dollar, the percentage change displayed in the box will represent GBP (base)/USD (quote).

Author

Haresh Menghani

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

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