GBP/JPY finds temporary support near 198.00, outlook remains bearish
- GBP/JPY finds a temporary support near 198.00 as the rally in the Japanese Yen hits a pause.
- The US government shutdown has increased the safe-haven demand of the Japanese Yen.
- BoE’s Breeden delivers dovish interest rate guidance, citing economic risks.
The downfall in the GBP/JPY pair hits a pause after a three-day losing streak around 198.00 during the Asian trading session on Thursday. However, the outlook of the pair remains bearish as the safe-haven appeal of the Japanese Yen (JPY) has increased, following the United States (US) government closure.
Washington went into darkness on Tuesday midnight after government funding stopped as Republicans failed to persuade Democrats to support the stopgap bill in voting at the House of Senate. This has forced investors to shift to the safe-haven fleet.
Another reason behind the strength in the Japanese Yen is firm expectations that the Bank of Japan (BoJ) will remain on its path towards policy normalization. The BoJ Summary of Opinions (SOP) for the September meeting showed that Japan’s central bank will continue aiming towards increasing interest rates if the economy and prices move in line with forecasts.
However, BoJ’s SOP showed that officials are still concerned about a potential economic slowdown due to tariffs imposed by the US, while they were confident that its impact would be temporary.
Meanwhile, the Pound Sterling (GBP) is broadly under pressure as Bank of England (BoE) Deputy Governor Sarah Breeden has argued in favour of reducing interest rates, citing that higher interest rates for longer could harm economic prospects and push inflationary pressures below the central bank’s target of 2%. “Risks in holding policy too tight for too long could pull inflation below target,” Breeden said on Tuesday.
BoE’s Breeden was one of seven Monetary Policy Committee (MPC) members who voted to hold interest rates steady at 4% in the September policy meeting.
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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