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GBP/JPY bounces off daily low, keeps the red above mid-185.00s amid modest JPY strength

  • GBP/JPY meets with fresh supply on Thursday and erodes a part of the previous day’s move-up.
  • A combination of factors underpins the safe-haven JPY and exerts some pressure on the cross. 
  • Mixed signals from BoJ officials cap gains for the JPY and help spot prices to pare intraday losses.

The GBP/JPY cross extends the previous day's late pullback from the weekly peak – levels just above the 188.00 mark – and attracts some follow-through sellers on Thursday. Spot prices, however, recovered over 100 pips from the daily low and traded just above the mid-185.00s during the early part of the European session.

The Bank of Japan’s (BoJ) summary of opinions from the July policy meeting indicated that some members see room for further rate hikes and policy normalization. This, along with a generally weaker risk tone, underpins the safe-haven Japanese Yen (JPY) and exerts some downward pressure on the GBP/JPY cross. The market sentiment remains fragile in the wake of concerns about an economic downturn in the US and China – the world's two largest economies – and escalating geopolitical tensions in the Middle East.

The British Pound (GBP), on the other hand, benefits from the emergence of some selling around the US Dollar (USD). This, in turn, assists the GBP/JPY cross to attract some dip-buying near the 184.45 region. Any meaningful upside, however, still seems elusive in the wake of the ongoing riots in the UK and dovish Bank of England (BoE) expectations. The BoE lowered rates for the first time in more than four years, from a 16-year high to 5.0% last Thursday, while traders are pricing in the possibility of two more cuts by the year-end. 

Meanwhile, BoJ Deputy Governor Shinichi Uchida downplayed the chances of a near-term rate hike on Wednesday. That said, BoJ Governor Kazuo Ueda's hawkish comments last week keep the door open for further policy tightening by the central bank. This, in turn, makes it prudent to wait for strong follow-through buying before confirming that the GBP/JPY cross has formed a near-term bottom and positioning for an extension of this week's bounce from the vicinity of the 180.00 psychological mark, or over a seven-month low.

Bank of Japan FAQs

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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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