- GBP/JPY continues to gain ground due to improved market sentiment.
- The Pound Sterling may struggle due to the increased likelihood of BoE’s rate cuts in 2025.
- Japan’s Core Machinery Orders grew by 3.4% MoM in November, marking the strongest growth in nine months.
GBP/JPY extends its gains for the second consecutive day, trading around 190.30 during the European hours on Monday. The GBP/JPY cross's upside momentum can be linked to risk-on sentiment. However, the British Pound (GBP) may encounter challenges due to weak UK economic data, which have fueled expectations of interest rate cuts by the Bank of England (BoE).
Following last week's weaker-than-expected UK Retail Sales and Gross Domestic Product (GDP) figures, traders anticipate additional rate cuts by the BoE in 2025. These disappointing data points highlight the UK’s gloomy economic outlook, potentially putting downward pressure on the Pound against other currencies.
The BoE is broadly expected to lower interest rates by 25 basis points (bps) at its February meeting. Markets have now priced in over 75 bps of total rate cuts for 2025, an increase from the approximately 65 bps anticipated before the latest data.
However, the upside of GBP/JPY may be capped as the Japanese Yen (JPY) finds modest support from positive domestic data and policy expectations. Japan's Core Machinery Orders rose for the second consecutive month, signaling a continued recovery in capital expenditure. According to government data released earlier on Monday, Core Machinery Orders increased by 3.4% month-on-month in November 2024, the strongest growth in nine months.
Additionally, speculation that the Bank of Japan (BoJ) might raise interest rates later this week has further bolstered the JPY. BoJ Governor Kazuo Ueda recently highlighted optimism surrounding wage growth and emphasized that the central bank could raise the policy rate again this year if economic and price conditions continue to improve.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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