GBP/JPY holds losses near 195.50 ahead of UK labor market

GBP/JPY may regain its ground as the BoJ is widely expected to avoid a rate hike on Thursday.
BoJ policymakers appear reluctant to tighten monetary policy further.
The Pound Sterling remains subdued ahead of UK employment figures.

GBP/JPY halts its two days of gains, trading around 195.40 during the Asian hours on Tuesday. However, the downside of the GBP/JPY cross would be limited as the Japanese Yen (JPY) may depreciate amid the rising likelihood that the Bank of Japan (BoJ) may avoid an interest rate hike on Thursday.

The markets are currently pricing in less than a 30% chance of a BoJ’s rate hike in December. Several Bank of Japan (BoJ) policymakers seem in no hurry to tighten monetary policy further, given the minimal risk of inflation overshooting despite Japan's persistently near-zero borrowing costs.

Reports suggested the central bank sees "little cost" in delaying further tightening, preferring to wait for more evidence of wage growth before implementing additional policy adjustments. Japan's economy minister, Ryosei Akazawa, reaffirmed that the Bank of Japan and the government will collaborate on appropriate monetary policies.

Japan’s 10-year government bond yield rose to near 1.08% on Tuesday, mirroring the upward movement in US Treasury yields as speculation grew that the US Federal Reserve could signal fewer interest rate cuts for next year. However, the Fed is still widely expected to reduce borrowing costs by 25 basis points on Wednesday.

UK S&P Global/ CIPS Purchasing Managers’ Index (PMI) report showed that the overall business activity expanded at a steady pace to 50.5 in December. Meanwhile, the Manufacturing PMI declined at a faster pace to 47.3 from 48.0 in November. The Service sector activity expanded at a faster pace to 51.4, from the estimates of 51.0 and the former release of 50.8.

While the data indicated steady overall growth, survey respondents expressed concerns about the business outlook, citing fragile consumer confidence, tighter corporate budgets, and reductions in non-essential spending.

Traders are set to monitor the UK employment data on Tuesday, followed by the Consumer Price Index (CPI) inflation figures on Wednesday, ahead of the Bank of England's (BoE) rate decision on Thursday. The BoE is widely expected to maintain interest rates, with an anticipated eight-to-one vote split, as one notably dovish policymaker is likely to support a rate cut.

Economic Indicator

Claimant Count Change

The Claimant Count Change released by the UK Office for National Statistics presents the change in the number of unemployed people in the UK claiming benefits. There is a tendency for the metric to influence GBP volatility. Usually, a rise in the indicator has negative implications for consumer spending and economic growth. Generally, a high reading is seen as bearish for the Pound Sterling (GBP), while a low reading is seen as bullish.

Why it matters to traders?

The change in the number of those claiming jobless benefits is an early gauge of the UK’s labor market. The figures are released for the previous month, contrary to the Unemployment Rate, which is for the prior one. This release is scheduled around the middle of the month. An increase in applications is a sign of a worsening economic situation and implies looser monetary policy, while a decrease indicates improving conditions. A higher-than-expected outcome tends to be GBP-bearish.

Employment FAQs

How do employment levels affect currencies?

Labor market conditions are a key element to assess the health of an economy and thus a key driver for currency valuation. High employment, or low unemployment, has positive implications for consumer spending and thus economic growth, boosting the value of the local currency. Moreover, a very tight labor market – a situation in which there is a shortage of workers to fill open positions – can also have implications on inflation levels and thus monetary policy as low labor supply and high demand leads to higher wages.

Why is wage growth important?

The pace at which salaries are growing in an economy is key for policymakers. High wage growth means that households have more money to spend, usually leading to price increases in consumer goods. In contrast to more volatile sources of inflation such as energy prices, wage growth is seen as a key component of underlying and persisting inflation as salary increases are unlikely to be undone. Central banks around the world pay close attention to wage growth data when deciding on monetary policy.

How much do central banks care about employment?

The weight that each central bank assigns to labor market conditions depends on its objectives. Some central banks explicitly have mandates related to the labor market beyond controlling inflation levels. The US Federal Reserve (Fed), for example, has the dual mandate of promoting maximum employment and stable prices. Meanwhile, the European Central Bank’s (ECB) sole mandate is to keep inflation under control. Still, and despite whatever mandates they have, labor market conditions are an important factor for policymakers given its significance as a gauge of the health of the economy and their direct relationship to inflation.

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