- GBP/JPY depreciates due to hawkish sentiment surrounding the BoJ’s policy stance.
- BoJ’s Nagakawa said that the central bank may reconsider its tapering plan.
- UK GDP showed zero growth in July, reinforcing the odds of a BoE 25 basis points rate cut in November.
GBP/JPY extends its downside for the second successive day, trading around 185.00 during the European session on Wednesday. The Japanese Yen (JPY) gains ground following the remarks from Bank of Japan (BoJ) board member Junko Nagakawa.
BoJ board member Nagakawa stated that the central bank may adjust the extent of its monetary easing if the economy and prices align with its projections. Despite the rate hike in July, real interest rates remain deeply negative, and accommodative monetary conditions persist. Should long-term rates surge, the BoJ may reconsider its tapering plan during its policy meetings, as necessary.
In the United Kingdom (UK), the UK GDP showed no growth in July, following a stagnation in June, according to the latest data released by the Office for National Statistics (ONS) on Wednesday. This fell short of the market forecast, which anticipated 0.2% growth for the month. Meanwhile, the Index of Services for July posted a 0.6% increase on a three-month rolling basis, down from June’s 0.8% figure.
No growth in the economy reinforces expectations of a possible quarter-point rate cut by the Bank of England (BoE) in November. Some traders are also pricing in the possibility of an additional rate cut in December.
Additionally, the UK Total Trade Balance showed that the deficit widened to £7.514 billion in July, up from £5.324 billion in June, marking the largest trade gap since April. Imports fell to a four-month low of £77.12 billion, while Exports dropped to a 25-month low of £69.60 billion.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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