GBP/JPY faces some selling pressure below 189.00 amid hawkish sentiment surrounding the BoJ

GBP/JPY attracts some sellers to near 188.70 in Monday’s early European session, down 1.27% on the day.
A rebound in Japanese 2Q GDP supports the case for a rate hike by the BoJ.
The preliminary UK August S&P Global/CIPS Manufacturing PMI and Japanese July National CPI will be the highlights this week.

The GBP/JPY cross weakens around 188.70 on Monday during the early European trading hours. Hawkish sentiment surrounding the Bank of Japan (BoJ) and the stronger Japanese second-quarter Gross Domestic Product (GDP) data support the rally of the Japanese Yen (JPY) and drag the cross lower.

Investors seem to be optimistic that Japan's better second-quarter GDP report last week would convince the Bank of Japan (BoJ) to raise interest rates further, which boosts the JPY broadly. The Japanese economy grew by 0.8% quarter-on-quarter in Q2, beating the market estimation of 0.5%.

Kazutaka Maeda, an economist at Meiji Yasuda Research Institute, said that the reports are simply positive overall and “it supports the BoJ’s view and bodes well for further rate hikes, although the central bank would remain cautious as the last rate increase had caused a sharp spike in the Yen.”

Japanese Economy Minister Yoshitaka Shindo stated last week that the economy is estimated to recover gradually as wages and income improve, adding that the government will collaborate closely with the BoJ to implement flexible monetary policy in the future.

On the other hand, the encouraging UK Retail Sales data on Friday has diminished bets of a second straight Bank of England (BoE) interest rate cut. This, in turn, might cap the downside for the Pound Sterling (GBP). However, UBS analysts expect another rate cut by the BoE in November. “We expect another 25 bps cut in November with more to come in 2025,” said UBS analysts.

Traders will keep an eye on the preliminary UK S&P Global/CIPS Manufacturing Purchasing Managers Index (PMI) for August and Japanese National CPI for July for fresh impetus, which is due on Thursday and Friday, respectively.

Japanese Yen FAQs

What key factors drive the Japanese Yen?

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.

How do the decisions of the Bank of Japan impact the Japanese Yen?

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 current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.

How does the differential between Japanese and US bond yields impact the Japanese Yen?

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 supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.

How does broader risk sentiment impact the Japanese Yen?

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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