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GBP/JPY holds losses near 192.50 due to increased likelihood of BoJ rate hikes

  • GBP/JPY depreciates as the Japanese Yen gains ground amid rising expectations of the BoJ hiking interest rates on Friday.
  • Japan’s trade surplus rose to ¥130.9 billion in December, against market expectations of a ¥55 billion deficit.
  • The Pound Sterling comes under pressure as higher-than-expected UK Public Sector Net Borrowing data for December clouds the economic outlook.

GBP/JPY pauses its four-day rally, trading near 192.50 during Thursday's European session. The GBP/JPY cross faces headwinds as the Japanese Yen (JPY) regains some strength amid rising expectations that the Bank of Japan (BoJ) will announce an interest rate hike after its two-day policy meeting on Friday. Supporting the JPY further is Japan’s better-than-expected Trade Balance data.

Japan reported a trade surplus of ¥130.9 billion in December, significantly outperforming market expectations of a ¥55 billion deficit. This shift was primarily driven by stronger-than-expected export growth, which rose 2.8% year-over-year in December, though it marked a slowdown from the 3.8% increase recorded in November. Meanwhile, imports recovered after contracting by 3.8% YoY in November, growing 1.8% last month. However, this fell short of the anticipated 2.6% growth, reflecting continued weakness in domestic demand.

The Pound Sterling (GBP) faces pressure after higher-than-expected UK Public Sector Net Borrowing data for December dampened the economic outlook. According to the Office for National Statistics (ONS), elevated borrowing costs and a one-time payment for repurchasing military housing contributed to a wider budget deficit.

Adding to the downward momentum, the British Pound is weighed down by recent data including softer-than-expected UK inflation and retail sales data for December, weakening labor demand over the three months to November, and tepid GDP growth. These factors have led traders to anticipate a 25 basis point (bps) rate cut by the Bank of England (BoE) in February. Markets are now pricing in a near-certain reduction in the BoE’s policy rate to 4.5% at its upcoming meeting.

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.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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