- GBP/JPY retraces as BoJ officials indicate potential further policy tightening.
- JP Morgan Asset Management suggests that the BoJ might only consider increasing rates further if the Fed lowers its rates.
- The Pound Sterling may decline due to increased safe-haven flows amid heightened Middle-East tensions.
GBP/JPY halts its recent gains from the previous two sessions, trading around 187.40 during the Asian session on Friday. Traders closely monitor Japan's monetary policy outlook, as central bank officials have signaled a readiness to raise rates further. However, they have adopted a more cautious stance due to heightened market volatility.
On Friday, Bloomberg reported that JP Morgan Asset Management (JPAM) believes the Bank of Japan is unlikely to raise interest rates in the near term. According to JPAM, the BoJ may only consider further rate hikes if the Federal Reserve cuts rates and the US economy stabilizes. They anticipate that any additional tightening by the BoJ is more likely to occur in 2025, provided the global economic environment remains stable.
The GBP/JPY cross may experience downward pressure due to increased safe-haven flows amid heightened geopolitical tensions in the Middle East. The recent escalation followed the killing of senior members of militant groups Hamas and Hezbollah, which raised concerns about potential retaliatory actions by Iran against Israel.
On Thursday, Israeli forces intensified their airstrikes on the Gaza Strip, resulting in at least 40 casualties, according to Palestinian medics. This escalation has further intensified the conflict between Israel and Hamas-led militants, as Israel prepares for the possibility of a broader regional conflict.
The Pound Sterling (GBP) faced challenges following the Bank of England's (BoE) decision last week to cut interest rates from a 16-year high. The rate was lowered by a quarter-point to 5% after a close vote among policymakers, who were divided on whether inflation pressures had sufficiently eased. BoE Governor Andrew Bailey indicated that the Monetary Policy Committee would proceed cautiously in the future.
(This story was corrected on August 9 at 10:05 GMT to say, at the first bullet point, that GBP/JPY retraces, not appreciates, and to say, in the first paragraph, that GBP/JPY halts its recent gains, not recovers its recent gains).
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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