- GBP/JPY recovers as UK government bond yields ease and risk appetite returns.
- Central banks intervene to address the liquidity crisis in the banking sector.
- Fed opens the discount window and major US banks support First Republic Bank, boosting market sentiment.
GBP/JPY marches higher on the back of easing UK Government bond 10-Year yield (Gilts) and a risk-on environment. It all started earlier this week with back-to-back liquidity issues involving Silicon Valley Bank (SVB), Signature Bank, Credit Suisse, and First Republic Bank.
The worsening financial conditions among banks injected turbulence and prompted a risk-averse environment earlier in the week. As a result, yield complexes began to fall in anticipation that central banks would scale down their aggressive tightening cycles amid receding liquidity.
Surging borrowing costs globally have prompted small to medium banks to struggle with their reserve requirement ratios to maintain normal banking operations. Consequently, investor confidence started to fade during this financial turbulence, and the market exerted pressure on yield complexes. This led to increased Japanese Yen safe-haven demand and a significant fall in GBP/JPY.
Amid this shift in the banking sectors, major central banks like the Federal Reserve (Fed), Bank of England (BoE), and Swiss National Bank (SNB) intervened to stem the liquidity crisis.
On Wednesday, the BoE intervened in Credit Suisse's situation, while the SNB provided a covered loan facility. Several large-sized US banks announced a joint effort to provide up to $30 billion in deposits for First Republic Bank, including J.P. Morgan, Bank of America, Wells Fargo, and Citibank. On Thursday, the Fed also opened its discount window to provide liquidity in an exercise to tame any possible contagion in the banking sector. All these efforts have boosted risk sentiment, resulting in muted demand for the Japanese Yen across the board.
Levels to watch
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