GBP/JPY flat lines below 191.00 mark despite broadly weaker JPY

GBP/JPY struggles to gain any meaningful traction on Tuesday amid mixed cues.
Trade deal hopes undermine the safe-haven JPY and lend support to the cross.
A modest USD strength weighs on the GBP and caps the upside for spot prices.

Haresh Menghani FXStreet

The GBP/JPY cross struggles to capitalize on its modest Asian session uptick and currently trades just below the 191.00 round-figure mark, nearly unchanged for the day. The downside, however, remains cushioned amid the emergence of some selling around the Japanese Yen (JPY), warranting some caution for bearish traders.

Despite mixed signals regarding the state of negotiations between the US and China, investors remain hopeful over the potential de-escalation of trade tensions between the world's two largest economies. This remains supportive of a positive risk tone, which undermines demand for traditional safe-haven assets, including the JPY, and should act as a tailwind for the GBP/JPY cross.

Meanwhile, traders have pushed back expectations for an immediate interest rate hike by the Bank of Japan (BoJ) due to rising economic risks from US tariffs. However, signs of broadening inflation in Japan keep the door open for further policy tightening by the BoJ later this year. This might hold back the JPY bears from placing aggressive bets ahead of the BoJ meeting this week.

The Japanese central bank is scheduled to announce its decision on Thursday and is expected to keep interest rates steady. Hence, investors will scrutinize the BoJ’s updated economic projections for cues about the timeline for the next rate hike, which will play a key role in influencing the near-term JPY price dynamics and provide a fresh impetus to the GBP/JPY cross.

In the meantime, persistent geopolitical risks stemming from the protracted Russia-Ukraine war might contribute to limiting the JPY losses. The British Pound (GBP), on the other hand, is pressured by the emergence of some US Dollar (USD) dip-buying. This suggests that any intraday move up in the GBP/JPY cross could be seen as a selling opportunity and remain capped.

Risk sentiment FAQs

What do the terms"risk-on" and "risk-off" mean when referring to sentiment in financial markets?

In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.

What are the key assets to track to understand risk sentiment dynamics?

Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.

Which currencies strengthen when sentiment is "risk-on"?

The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.

Which currencies strengthen when sentiment is "risk-off"?

The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.

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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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