- GBP/JPY attracts sellers for the second straight day, though the downside seems limited.
- Intervention fears prompt some JPY short-covering and exert pressure on spot prices.
- The BoJ’s dovish stance and the risk-on mood warrant some caution for aggressive bears.
The GBP/JPY cross drifts lower for the second straight day on Friday and moves away from its highest level since August 2008, around the 206.15 area touched earlier this week. Spot prices currently trade just above the 205.00 psychological mark, down nearly 0.35% for the day amid fears that Japanese authorities or the Bank of Japan (BoJ) might intervene in the markets to prop up the domestic currency.
In fact, Japan’s Finance Minister Shunichi Suzuki cross the wires earlier today and said that he will closely monitor stock and forex markets with vigilance, adding that a weak Japanese Yen (JPY) is having an impact on prices. That said, any meaningful JPY appreciation still seems elusive in the wake of a dovish stance adopted by the Bank of Japan (BoJ), which, so far, has been reluctant to provide a detailed plan for the reduction of bond purchases and further rate increases. Apart from this, the prevalent risk-on environment should cap the safe-haven JPY and limit losses for the GBP/JPY cross.
The British Pound (GBP), on the other hand, gets a minor boost after exit polls suggested that Britain’s main opposition Labour Party was set to win a massive majority in the UK general election. Meanwhile, the outcome sets the stage for a rate cut by the Bank of England (BoE) in August, which should act as a headwind for the Sterling and the GBP/JPY cross. Furthermore, the overbought Relative Strength Index (RSI) on the daily chart might prompt some profit-taking heading into the weekend. Nevertheless, spot prices seem poised to end in the positive territory for the fourth successive week.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, aka ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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