GBP/JPY advances as markets scale back BoE rate-cut expectations
- GBP/JPY rises for a third straight day as traders reassess BoE and BoJ policy outlook.
- Surging Oil prices linked to the US-Iran war revive global inflation concerns.
- Markets scale back BoE rate-cut bets, with money markets now pricing a possible hike by year-end.
GBP/JPY extends gains on Monday, rising for a third consecutive day as traders reassess the monetary policy outlook for the Bank of England (BoE) and the Bank of Japan (BoJ) amid soaring Oil prices driven by the escalating US-Iran war, which is reviving global inflation concerns.
At the time of writing, GBP/JPY is trading around 211.70. With little in the way of economic data from the UK and Japan, the cross remains largely driven by shifting interest-rate expectations.
The British Pound (GBP) is outperforming the Japanese Yen (JPY) as traders scale back expectations for near-term easing by the BoE and begin to price in the possibility of a rate hike.
Before the Iran conflict escalated, markets had priced in roughly an 80% probability of a rate cut at the BoE’s March 19 meeting, with another reduction expected later in the year. However, money markets now see around a 50% probability of a rate hike by the end of the year, Bloomberg reported.
Meanwhile, the Japanese Yen remains under pressure as traders expect the BoJ to proceed cautiously with further policy tightening. The Middle East conflict could delay the timing of the next rate hike, as Japan’s heavy reliance on energy imports may weigh on economic growth.
BoJ Governor Kazuo Ueda reiterated that the central bank will continue raising interest rates if economic and inflation trends evolve in line with projections. However, he added that policymakers will “closely watch the impact of Middle East developments on the domestic and overseas economy.”
Japan’s Prime Minister Sanae Takaichi said on Monday that the government is considering measures funded from emergency reserves to prevent gasoline prices from rising to levels intolerable for households. Separately, Japan has instructed a national oil reserve site to prepare for a potential crude release, according to Nikkei.
On the data front, Japan’s Labor Cash Earnings rose 3.0% YoY in January, up from 2.4% in December. Meanwhile, the Current Account surplus stood at ¥941.6 billion, below expectations of ¥960 billion and sharply down from ¥7,288 billion in December.
Looking ahead, Japan’s Gross Domestic Product (QoQ) for Q4 is due on Tuesday, followed by Producer Price Index (PPI) data on Wednesday. In the UK, January GDP data will be released on Friday, along with Industrial Production, Manufacturing Production, and Consumer Inflation Expectations.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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