GBP/JPY climbs back above mid-199.00s; BoJ's hawkish stance could limits gains

GBP/JPY regains positive traction on Wednesday amid a supportive fundamental backdrop.
Diminishing odds for an immediate BoE rate cut act as a tailwind for the British Pound.
Hawkish BoJ expectations underpin the JPY and might cap any further gains for the cross.

Haresh Menghani FXStreet

The GBP/JPY cross stalled this week's retracement slide from the 200.35 region, or its highest level since July 2024, and staged a goodish intraday recovery from the weekly low touched on Tuesday. The momentum extends through the Asian session on Wednesday and lifts spot prices back above mid-199.00s in the last hour.

The British Pound (GBP) continues with its relative outperformance against its Japanese counterpart amid diminishing odds for an immediate interest rate cut by the Bank of England (BoE). The Japanese Yen (JPY), on the other hand, is undermined by bets that domestic political uncertainty could temporarily hinder the Bank of Japan (BoJ) from normalising policy. Apart from this, a generally positive risk tone is seen as another factor acting as a tailwind for the GBP/JPY cross.

However, the risk of a further escalation of geopolitical tensions and persistent trade-related uncertainties could limit deeper losses for the safe-haven JPY. Furthermore, investors have been pricing in the possibility of an imminent BoJ rate hike by the end of this year. In contrast, BoE Governor Andrew Bailey said recently that interest rates would continue to move downwards gradually over time. The divergent BoJ-BoE policy outlook might cap gains for the GBP/JPY cross.

The aforementioned mixed fundamental backdrop warrants some caution for bullish traders and positioning for any further near-term appreciating move in the absence of any relevant market-moving economic releases from the UK or Japan. Traders might also opt to move to the sidelines ahead of the UK macro data dump on Friday, including the monthly GDP print, which will play a key role in influencing the GBP and providing some meaningful impetus to the GBP/JPY cross.

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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