British Pound bounces off weekly low vs fragile Yen; intervention risks cap upside
- GBP/JPY attracts some dip-buyers on Thursday as Japan’s fiscal woes undermine the JPY.
- BoE rate-hike bets offer some support to the GBP ahead of speeches from BoE MPC members.
- Intervention risks and the hawkish BoJ help limit JPY losses, capping gains for spot prices.
The GBP/JPY cross reverses an intraday dip to the 208.20-208.15 area on Thursday, stalling the previous day's retracement slide from a one-and-a-half-week low. Spot prices, however, lack follow-through and trade around the 209.00 round figure during the early European session, nearly unchanged for the day amid mixed cues.
The Japanese Yen (JPY) struggles to attract any meaningful buyers amid the market anxiety over Japan’s aggressive expansionary fiscal policies and massive public debt. This, in turn, is seen as a key factor offering some support to the GBP/JPY cross. JPY traders, however, remain on high alert amid speculations that Japanese authorities will step in again to prop up the domestic currency. Moreover, hawkish Bank of Japan (BoJ) expectations continue to limiting JPY losses.
In fact, a dovish-leaning BoJ board member, Ayano Sato, surprised markets earlier on Wednesday by showing openness to further monetary tightening. Adding to this, BoJ Governor Kazuo Ueda's hawkish remarks reaffirmed expectations for more interest rate hikes, which might hold back bears from placing aggressive bets on the JPY. Furthermore, a bullish US Dollar (USD) is seen weighing on the British Pound (GBP), which contributes to capping the GBP/JPY cross.
Meanwhile, markets are currently pricing in a greater probability of a 25-basis-point interest rate hike by the Bank of England (BoE) at its next policy meeting on November 5. Traders now look to speeches from BoE MPC members – Megan Greene and Clare Lombardelli – for some impetus later today. Meanwhile, the mixed fundamental backdrop support prospects for an extension of the GBP/JPY pair's one-month-old range-bound price action, warranting caution before placing fresh directional bets.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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