GBP/JPY extends decline below 194.50 ahead of BoE rate decision
- GBP/JPY trades in negative territory for the third consecutive day around 194.45 in Thursday’s early European session.
- BoE is expected to keep interest rates on hold on Thursday amid tariff uncertainty and the Israel-Iran conflict.
- Reduced bets for the BoJ rate hikes this year might weigh on the JPY.
The GBP/JPY cross extends its downside to near 194.45 during the early European trading hours on Thursday. The Pound Sterling (GBP) softens against the Japanese Yen (JPY) due to the looming threat of a broader conflict in the Middle East and possible US involvement. Investors will keep an eye on the Bank of England (BoE) interest rate decision later on Thursday.
The BoE is anticipated to keep interest rates on hold at 4.25% at its June meeting on Thursday. Nearly all 60 respondents expected the next quarter-point rate reduction to come in August, and a large majority saw a further cut to 3.75% in the final three months of 2025, according to a Reuters poll. Policymakers will closely monitor the impact of Middle East geopolitical tensions, as the conflict between Israel and Iran could well push up the oil prices.
"The current tensions in the Middle East are causing greater economic uncertainty. We therefore expect the Bank of England to keep rates on hold this Thursday and implement just one further cut this year,” said Monica George Michail, associate economist at the National Institute of Economic and Social Research. Any signs of escalation could drag the riskier assets like the Pound Sterling (GBP) lower against the Japanese Yen.
On the other hand, the Bank of Japan (BoJ) may take a long pause before raising interest rates again this year. BoJ Governor Kazuo Ueda said on Tuesday that the central bank's near-term attention was on downside risks to Japan's economy, with the impact of US tariffs expected to worsen in the second half of this year, suggesting that the BoJ was in no hurry to begin rate hikes. The dovish remarks from the BoJ and US trade policy uncertainty might weigh on the Japanese Yen (JPY) and help limit the GBP/JPY’s losses.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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