GBP/JPY falls to two-month lows below 197.00 amid risk-off mood

GBP/JPY attracts some sellers near 196.65 in Thursday’s early European session, down 1.0% on the day.
The combination of a risk-off mood and rising bets on the BoJ rate hike supports the JPY.
The BoE is anticipated to cut the bank rate to 5% at its August meeting next week.

The GBP/JPY cross remains under selling pressure around 196.65 during the early European session on Thursday. The beginning of a risk-off mood leads to more safety flows in broader markets, including the Japanese Yen (JPY).

S&P 500 futures were down 0.10% ahead of the European market open, while the Nikkei closed down more than 3%, marking its lowest level since late April. The risk-off environment has underpinned the safe-haven currency like the JPY and dragged the GBP/JPY cross lower to the lowest level since May 16.

Furthermore, the growing speculation that the Bank of Japan (BoJ) would hike again at its monetary policy meeting next week forced short-sellers to close their positions, which lifted the JPY against its rivals.

On the other hand, the Bank of England (BoE) is expected to cut the bank rate to 5% at its August meeting next week, the majority of economists said in a Reuters poll. This, in turn, exerts some selling pressure on the Pound Sterling (GBP). Traders are now pricing in a nearly 45% odds that the UK central bank will cut its policy rate to 5.0% next week.

Data released on Wednesday showed that UK business activity expanded in July. The UK S&P Global Flash Composite Purchasing Managers’ Index (PMI) came in better than the market expectation, rising to 52.7 in July from 52.3 in June. Meanwhile, the Manufacturing PMI climbed to 51.8 in July from the previous reading of 50.9, the highest level in two years. The Services PMI expanded to 52.4 in the same report period versus 51.2, below the consensus of 52.5.

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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