- GBP/JPY rallies over 400 pips intraday after BoJ Deputy Governor Uchida’s remarks.
- A positive risk tone further undermines the safe-haven JPY and remains supportive.
- The lack of follow-through buying warrants caution before placing fresh bullish bets.
The GBP/JPY cross catches aggressive bids during the Asian session on Wednesday and touches an intraday high, around the 187.25 region in reaction to dovish remarks from the Bank of Japan (BoJ) official. Spot prices, however, trim a part of strong intraday gains and currently trade around mid-186.00s, still up 1.80% for the day.
The Japanese Yen (JPY) weakens across the board after BoJ Deputy Governor Shinichi Uchida said that the central bank won't hike rates when markets are unstable, pushing the GBP/JPY cross higher. Uchida added that the interest rate path will obviously change if, as a result of market volatility, economic forecasts, views on risks and likelihood of achieving projections change.
Apart from this, a generally positive tone around the equity markets dents the JPY's relative safe-haven status against its British counterpart and offers support to the GBP/JPY cross. Investors, however, seem convinced that the BoJ will tighten monetary policy again. The bets were reaffirmed by data on Monday, which showed a rise in Japan's real wages in June for the first time in more than two years.
Furthermore, public broadcaster NHK reported that the Japanese labour ministry has decided to raise the national average minimum wage by about 5% – the biggest ever jump. This, along with geopolitical risks stemming from the ongoing conflicts in the Middle East, might hold back the JPY bears from placing aggressive bets and keep a lid on any further appreciating move for the GBP/JPY cross.
The British Pound (GBP), on the other hand, might continue to be weighed down by the Bank of England's (BoE) first interest rate cut in more than four years, from a 16-year high to 5.0% last Thursday. This further makes it prudent to wait for strong follow-through buying before confirming that the GBP/JPY cross has bottomed out near the 180.00 mark, or its lowest level since January touched on Monday.
Bank of Japan FAQs
The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.
The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.
The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.
A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.
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