GBP/JPY steady near weekly highs as Yen weakens on softer Tokyo inflation
- GBP/JPY edges higher as softer Tokyo CPI weighs on the Yen.
- Cooling inflation and weaker retail data reinforce expectations that the BoJ can afford to stay patient.
- Attention turns to the BoE’s interest rate decision amid still-elevated UK inflation.
The British Pound (GBP) trades firmer against the Japanese Yen (JPY) on Friday, as softer-than-expected Tokyo Consumer Price Index (CPI) data weigh on the Yen and revive doubts over the pace of policy normalisation by the Bank of Japan (BoJ). At the time of writing, GBP/JPY is trading around 212.16, hovering near the upper end of this week’s trading range.
Data released by the Statistics Bureau of Japan showed that inflation slowed in January. The Tokyo CPI rose 1.5% YoY, down from 2.0% in December, while both the CPI excluding fresh food and energy and the CPI excluding fresh food decelerated to 2.0% YoY, missing market forecasts of 2.3% and slowing from 2.2% in the prior month.
Following the data, a report published by BHH noted that the BoJ can afford to remain patient before resuming its rate-hiking cycle. The note added that the swaps market has trimmed the probability of a March rate hike to around 13%, from about 20% earlier this week, and now implies just over a 60% chance of a rate increase in April. BHH said its base case remains for the BoJ to deliver its next rate hike at the April 28 meeting.
Traders also digested a mixed batch of Japanese labour and consumption data released earlier in the day. Japan’s Unemployment Rate held steady at 2.6% in December.
Large Retailer Sales rose 2.0% YoY, slowing sharply from 5.0% in the previous month, while Retail Sales fell 0.9% YoY, missing expectations for a 0.7% increase and easing from 1.0% in the prior month.
On a monthly basis, seasonally adjusted Retail Sales dropped 2.0%, reversing the 0.6% rise seen in November.
Looking ahead, focus turns to the Bank of England’s (BoE) interest rate decision scheduled for February 5. The central bank is widely expected to keep rates unchanged at 3.75% as UK inflation remains well above the 2% target. Data released earlier this month showed headline CPI rose to 3.4% YoY from 3.2%, while core inflation held steady at 3.2%.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
Author
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
