GBP/JPY flat lines around 200.00, below multi-year top ahead of key central bank decisions
- GBP/JPY kicks off the new week on a softer note and eases from its highest level since July 2024.
- The divergent BoE-BoJ policy expectations turn out to be a key factor capping gains for the cross.
- The downside seems limited as traders keenly await the BoE and BoJ policy meetings this week.
The GBP/JPY cross struggles to capitalize on last Friday's closing above the 200.00 psychological mark for the first time since June 2024 and edges lower at the start of a new week. The downtick, however, lacks bearish conviction ahead of this week's key central bank event risks.
The Bank of England (BoE) is scheduled to announce its policy decision on Thursday and is widely anticipated to leave the key benchmark interest rate unchanged at 4%. Moreover, the central bank is seen maintaining a cautious wait-and-see approach for the rest of 2025 amid the recent rises in inflation expectations. This continues to underpin the British Pound (GBP) and acts as a tailwind for the GBP/JPY cross.
The Japanese Yen (JPY), on the other hand, continues with its struggle to attract any meaningful buyers amid expectations that domestic political turmoil could give the Bank of Japan (BoJ) more reasons to delay raising interest rates. This might contribute to limiting any meaningful corrective slide for the GBP/JPY cross. That said, investors seem convinced that the BoJ will stick to its policy normalization path.
The recent US-Japan trade agreement has eliminated a key source of uncertainty. Moreover, an upward revision of Japan's Q2 GDP growth figures, along with a tight labor market and a rise in real wages for the first time in seven months, backs the case for another rate hike by the BoJ this year. This marks a divergence in comparison to relatively dovish BoE expectations and could cap the GBP/JPY cross.
Hence, the market focus will also be on the outcome of a two-day BoJ policy meeting on Friday. In the meantime, the UK monthly employment details on Tuesday, along with the latest UK consumer inflation figures on Wednesday, might influence the GBP and provide some impetus to the GBP/JPY cross. The market reaction, however, is likely to be muted heading into the key central bank event risks.
(This story was corrected on September 15 at 07:09 to say that the GBP/JPY cross eases from its highest level since July 2024, not 2028 in the first bullet point, and that the pair closed on Friday above the 200.00 psychological mark for the first time since June 2024, not August 2008, in the first para.)
Pound Sterling FAQs
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).
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.
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.
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.
