- GBP/JPY continues to lose ground despite thin trading amid Japan’s bank holiday.
- The Japanese Yen receives support from the hawkish mood surrounding the Bank of Japan.
- The Bank of England is expected to hold rates steady at Thursday’s policy meeting.
GBP/JPY extends its decline for the second successive day, trading around 184.20 during Monday’s European hours. The Japanese Yen (JPY) finds support despite low trading volumes due to Japan's Respect-for-the-Aged Day Bank Holiday. This downside pressure on GBP/JPY cross is likely driven by the hawkish sentiment surrounding the BoJ.
Traders await interest rate decisions from the Bank of England (BoE) and the Bank of Japan (BoJ) later this week. The BoJ is widely expected to keep rates unchanged while leaving the possibility open for a rate hike as early as October. Similarly, the BoE is also expected to hold rates steady in its upcoming decision.
On Friday, Fitch Ratings' latest report on the Bank of Japan's policy outlook suggests that the BoJ might raise rates to 0.5% by the end of 2024, 0.75% in 2025, and 1.0% by the end of 2026. Additionally, the hawkish BoJ policymaker Naoki Tamura stated on Thursday that the central bank should raise interest rates to at least 1% as early as the second half of the next fiscal year. This comment reinforces the BoJ's commitment to ongoing monetary tightening.
On the United Kingdom (UK) front, the Pound Sterling (GBP) will be guided by the Consumer Price Index (CPI) data for August scheduled for Wednesday. The headline inflation is expected to rise steadily by 2.2% year-on-year in August. Meanwhile, annual Core inflation may grow at a faster pace of 3.5% from 3.3% in July.
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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