GBP/JPY climbs above two-week range as Yen weakens, Bailey testimony eyed
- GBP/JPY breaks above its two-week range amid renewed yen weakness.
- Reports suggest PM Takaichi adopted a firmer stance in talks with Governor Ueda.
- Markets turn to BoE Governor Andrew Bailey’s testimony for fresh policy signals.
The British Pound (GBP) strengthens against the Japanese Yen (JPY) on Tuesday as the yen weakens broadly after reports that Japan’s Prime Minister Sanae Takaichi raised concerns about further interest rate hikes in a meeting with Bank of Japan (BoJ) Governor Kazuo Ueda last week.
At the time of writing, GBP/JPY trades near 210.45, breaking above its two-week range and up around 0.82%.
According to the Mainichi, PM Takaichi took “a tougher attitude than during the last meeting in November last year.” Markets reacted swiftly, as the report added another layer of uncertainty to the Bank of Japan’s tightening path. However, the exact implications remain unclear.
Governor Kazuo Ueda said last Monday that the meeting was a general exchange of views on economic and financial developments and stressed that the prime minister did not make any specific monetary policy requests.
The prospect of a delay in raising borrowing costs weighs heavily on the yen. Markets are now awaiting further clarification from the BoJ, as traders reassess the timing of the next rate hike.
Earlier expectations had centered on a potential move as soon as April, but the latest developments raise the possibility that tightening could be pushed back to the second half of the year.
At the same time, recent data showed inflation eased in January, reinforcing the view that the BoJ can afford to remain patient before considering further rate hikes. Attention now shifts to Tokyo Consumer Price Index (CPI) data due on Friday.
In the United Kingdom, growing expectations of interest rate cuts by the Bank of England (BoE) could act as a headwind for the British Pound amid softer labor market conditions and easing inflation pressure.
Traders now await testimony from BoE Governor Andrew Bailey later in the day, along with remarks from several other policymakers.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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