GBP/JPY dives to near 199.50 as traders adopt caution
- GBP/JPY extends its losing streak due to the increased risk aversion.
- The Japanese Yen improves as traders expect the BoJ to raise rates in next week’s meeting.
- The Pound Sterling may limit its downside due to the reduced likelihood of an August rate cut by the BoE.
GBP/JPY continues to lose ground for the fourth consecutive day, trading around 199.50 during the Asian session on Wednesday. This downside could be attributed to the improved Japanese Yen (JPY) likely due to a return of risk-off flows. The Bank of Japan (BoJ) may raise interest rates at next week’s policy meeting, prompting short-sellers to exit their positions and providing support to the JPY.
On Tuesday, a senior official in the ruling party, Toshimitsu Motegi urged the Bank of Japan (BoJ) to more clearly communicate its plan to normalize monetary policy through gradual interest rate hikes, according to Reuters. Additionally, Prime Minister Fumio Kishida added that normalizing the central bank’s monetary policy would support Japan's transition to a growth-driven economy.
On data front, the Jibun Bank Japan Manufacturing PMI unexpectedly fell to 49.2 in July from 50.0 in the previous month, missing market forecasts of 50.5 and indicating the first decline in factory activity since April, according to preliminary estimates. In contrast, the Services PMI surged to 53.9 in July from a final reading of 49.4 in the prior month. This marks the sixth increase in the service sector this year and the steepest pace since April.
In the United Kingdom (UK), the reduced likelihood of an August rate cut by the Bank of England (BoE) is likely to support the British Pound (GBP) and mitigate declines in the GBP/JPY cross. Traders are anticipating the UK PMI activity survey results, set to be released during Wednesday’s London market session.
The market broadly expects a rebound in the July UK Services PMI, which fell to a seven-month low of 52.1 in June. Median forecasts predict a rise to 52.5. Additionally, the Manufacturing PMI is anticipated to increase to 51.1, up from the previous reading of 50.9.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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