GBP/JPY softens to near 195.00 ahead of BoE rate decision

GBP/JPY weakens to around 195.05 in Wednesday’s early European session.
The cautious sentiment supports the Japanese Yen, but reduced bets for a BoJ rate hike might cap its upside.
The BoE is widely expected to keep interest rates on hold at 4.25% on Thursday.

Lallalit Srijandorn FXStreet

The GBP/JPY cross trades in negative territory near 195.05 during the early European trading hours on Wednesday. The cautious mood in the market provides some support to the Japanese Yen (JPY), a safe-haven currency. Investors will closely monitor the Bank of England (BoE) interest rate decision on Thursday.

Investors assess the Israel-Iran conflict after US President Donald Trump urged “everyone” to immediately evacuate Tehran. Trump said that he wants a permanent end to Iran's route to nuclear weapons. Additionally, Trump posted on his social media platform late Tuesday, calling for Iran’s “unconditional surrender.” The renewed Middle East geopolitical tensions boost the safe-haven flows, benefiting the JPY against the Pound Sterling.

Inflation in the UK eased to 3.4% YoY in May from 3.5% in April, according to the Office for National Statistics on Wednesday. This reading came in line with the market consensus. Meanwhile, the Core CPI, which excludes the volatile prices of food and energy, climbed 3.5% YoY in May versus 3.8% prior, softer than the expectation of 3.6%.

Money markets expect the BoE to hold rates steady at 4.25% at its June meeting on Thursday and see about two more 25 basis points (bps) rate cuts by December. Markets expect the UK central bank will maintain its “gradual and careful” approach to easing policy. Any dovish remarks from the BoE officials could drag the GBP lower in the near term.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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