GBP/JPY rises above 199.00 due to political, trade uncertainties in Japan
- GBP/JPY gains ground as the Japanese Yen declines amid ongoing political uncertainty in Japan.
- The political concerns eased as Japan’s PM Ishiba vowed to remain in office despite the ruling LDP coalition’s defeat.
- Traders have slightly reduced their expectations for BoE policy easing, but they still project two rate cuts in 2025.
GBP/JPY continues its recovery, trading around 199.10 during the European hours on Tuesday. The currency cross gains ground as the Japanese Yen (JPY) struggles amid ongoing political uncertainty in Japan.
However, the concerns surrounding Japan’s politics, including severe political shakeup or potential resignation, have eased as Prime Minister (PM) Shigeru Ishiba is expected to remain in office despite the ruling Liberal Democratic Party (LDP) coalition losing its majority in the upper house election, as expected.
Additionally, the JPY faces downward pressure from prevailing trade uncertainties between Japan and the United States (US). Japan's chief tariff negotiator, Ryosei Akazawa, mentioned on Monday that he will aim for some kind of trade agreement with the US by August 1. Japan is now confronted with a new 25% US tariff on goods, scheduled to take effect on August 1, adding to the existing 25% tariff on automobiles, Japan’s largest export to the US
Traders will likely observe S&P UK Purchasing Managers Index (PMI) data, due on Thursday, is expected to report the mildest contraction in manufacturing in six months, though the strongest services sector growth in nearly a year.
The Bank of England (BoE) may slow or pause its sales of long-dated bonds amid weak demand from traditional buyers such as pension funds. Additionally, traders have slightly dialed back expectations for BoE policy easing; they still anticipate two rate cuts in 2025.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
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