British Pound turns lower as bulls shrug hawkish BoE; downside seems limited vs weak Yen

GBP/JPY struggles to capitalize on a modest uptick as a broadly firmer USD pressures the GBP.
The BoE’s hawkish stance could help limit GBP losses and support the cross amid a weaker JPY.
The uncertainty over the likely timing of the next BoJ rate hike keeps JPY bulls on the defensive.

Haresh Menghani FXStreet

The GBP/JPY cross attracts fresh sellers following an intraday uptick to the 212.15-212.20 area on Wednesday, retreating to the lower end of its daily range during the first half of the European session. Spot prices currently trade around the 211.70 region, though the fundamental backdrop warrants some caution for aggressive bearish traders.

A broadly firmer US Dollar (USD), bolstered by bets for a more aggressive policy tightening by the Federal Reserve (Fed), is seen weighing on the British Pound (GBP), which, in turn, acts as a headwind for the GBP/JPY cross. However, the Bank of England (BoE) hawkish stance could help limit deeper GBP losses. In fact, BoE Deputy Governor Clare Lombardelli said on Tuesday that further interest rate increases remain likely due to high energy prices and economic resilience in the UK.

Meanwhile, data released on Tuesday showed that Japan's Household Spending declined for the 10th straight month in September, complicating the Bank of Japan's (BoJ) plans for further interest rate hikes. This, along with the prevailing risk-on mood, is seen as undermining the safe-haven Japanese Yen (JPY) and should offer support to the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through selling before positioning for any meaningful depreciation in the near term.

Moving ahead, traders now look forward to Thursday's UK macro data dump, including the preliminary Q3 GDP print. In the meantime, the aforementioned supporting factors back the case for the emergence of some dip-buying at lower levels. Bulls, however, would need to wait for sustained strength and acceptance above a technically significant 100-day Simple Moving Average (SMA) resistance, currently pegged around the 213.00 round figure, before placing fresh bets.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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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