GBP/JPY surrenders major part of intraday gains to one-week top, back below mid-197.00s

GBP/JPY retreats after touching a one-week high earlier this Tuesday.
Intervention warning prompts JPY short-covering and exerts pressure.
BoJ rate hike uncertainty should cap the JPY and support spot prices.

Haresh Menghani FXStreet

The GBP/JPY cross attracts some intraday sellers following an early move up to the 198.25 area, or a one-week top and retreats to the lower end of its daily range during the first half of the European session. Spot prices slide back below the mid-197.00s amid the emergence of some buying around the Japanese Yen (JPY), though the fundamental backdrop warrants caution for bearish traders.

Japan’s Finance Minister Katsunobu Kato was out with some verbal intervention and reiterated that the government will take appropriate action against excessive FX moves, including those driven by speculators. Furthermore, the Bank of Japan (BoJ) Governor Kazuo Ueda left the door open for a rate hike at the January or March policy meeting. This, along with the cautious market mood, offers some support to the safe-haven JPY and exerts some downward pressure on the GBP/JPY cross.

Investors, however, remain sceptical about the likely timing of when the Bank of Japan (BoJ) will hike rates again, which, in turn, might hold back the JPY bulls from placing aggressive bets. The British Pound (GBP), on the other hand, draws support from a modest US Dollar (USD) weakness and might contribute to limiting any meaningful downside for the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through selling before confirming that spot prices have formed a near-term top.

Moving ahead, traders now look forward to the release of the UK Construction PMI, which might influence the GBP and provide some impetus to spot prices. The immediate market reaction, however, is likely to be short-lived, suggesting that the GBP/JPY cross remains at the mercy of the JPY price dynamics.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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