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GBP/JPY trades above 194.00 after recovering recent losses, US CPI eyed

  • GBP/JPY recovers daily losses ahead of the US inflation report.
  • The JPY depreciates due to uncertain expectations for BoJ's further rate hikes.
  • The Pound Sterling receives support from the increased likelihood of the BoE to keep its rates unchanged at 4.75% in December.

GBP/JPY recovers its daily losses and extends its gains for the third successive day, trading around 194.20 during the European session on Wednesday. However, the GBP/JPY cross faced challenges as the Japanese Yen (JPY) gained ground due to robust Producer Price Index (PPI) data, which suggested the possibility of further policy tightening by the Bank of Japan (BoJ).

The GBP/JPY cross may appreciate further, as the JPY struggles to maintain strong bullish momentum amid mixed sentiments surrounding the BoJ’s willingness to proceed with another rate hike in December.

While BoJ Governor Kazuo Ueda has suggested that the timing for the next rate hike is drawing closer, supported by robust underlying inflation data, dovish BoJ board member Toyoaki Nakamura has cautioned against raising rates prematurely, further fueling skepticism about the BoJ’s policy trajectory.

Moreover, the GBP/JPY cross regains its ground as the Pound Sterling (GBP) receives support from increased market confidence in the Bank of England (BoE) to keep its interest rates unchanged at 4.75% in December’s monetary policy decision.

BoE policymakers are anticipated to vote to keep interest rates unchanged, as UK headline inflation has risen again after briefly falling below the bank's 2% target. The central bank had previously forecasted a rebound in inflation following its temporary alignment with the target range.

Traders are likely to focus on the UK’s October monthly Gross Domestic Product (GDP) and Industrial and Manufacturing Production data. Economists anticipate growth in factory output and GDP following declines in September.

Central banks FAQs

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Akhtar Faruqui

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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