GBP/JPY holds position around 184.50 after paring gains

GBP/JPY rebounds from its lowest level of 180.10 since January, recorded on Monday.
Japan’s Labor Cash Earnings rose by 4.5% YoY in June, the highest increase since January 1997.
The Pound Sterling received pressure as sluggish market sentiment has dampened the appeal of risk-sensitive currencies.

Akhtar Faruqui FXStreet

GBP/JPY trades around 184.50 during the European hours on Tuesday, rebounding from its lowest level of 180.10 since January, recorded on Monday. However, The GBP/JPY cross faced challenges as the Japanese Yen (JPY) strengthened due to growing expectations that the Bank of Japan (BoJ) may implement further monetary policy tightening.

Japan’s Chief Cabinet Secretary Yoshimasa Hayashi stated on Tuesday that “wage increases are expected to extend to part-timers and small businesses by autumn, supported by strong Shunto results and minimum wage hikes.” Hayashi did not provide comments on foreign exchange levels.

Japan’s Labor Cash Earnings came in at 4.5% year-on-year increase in average income for June, exceeding both the previous 2.0% and the expected 2.3% readings. This is the highest increase since January 1997, reinforcing Japan's transition toward a rising interest rate environment.

The Pound Sterling (GBP) exhibited a weak performance as dismal market sentiment has dampened the appeal of risk-sensitive assets. Growing Middle East tensions and fears of an economic slowdown in the United States (US) have improved the appeal of safe-haven assets, such as the Japanese Yen, undermining the GBP/JPY cross

Additionally, the British Pound faced challenges as the Bank of England (BoE) delivered a broadly expected 25-basis point rate cut at its August meeting held last week.

BRC Like-For-Like Retail Sales in the United Kingdom rose 0.3% year-on-year in July, reversing from a 0.5% fall in June and matching market forecasts. Traders await S&P Global/CIPS Construction PMI for July, gauging business activity in the UK’s construction sector.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Akhtar Faruqui

FXStreet

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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