- GBP/JPY witnessed heavy selling in reaction to the BoE Governor Bailey’s dovish remarks.
- Bailey said that the central bank could become "a bit more activist" on interest rate cuts.
- Middle East tensions benefit the JPY’s relative safe-haven status and weigh on the cross.
The GBP/JPY cross continues with its struggle to find acceptance above the 195.00 psychological mark for the second time in two weeks and retreats sharply from a one-week high touched earlier this Thursday. The downward trajectory drags spot prices to the 192.25-192.20 area during the first half of the European session and is exclusively sponsored by the emergence of heavy selling around the British Pound (GBP).
In an interview with the Guardian, the Bank of England (BoE) Governor Andrew Bailey said that there was a chance that the central bank could become a bit more aggressive in cutting rates if there's further good news on inflation. Traders upped their bets for another 25-basis points interest rate cut by the BoE at its November meeting. This, in turn, drags UK gilts lower, along with the GBP, and prompts aggressive selling around the GBP/JPY cross.
Apart from this, a further escalation of geopolitical tensions in the Middle East benefits the Japanese Yen's (JPY) relative safe-haven status and contributes to the offered tone surrounding the currency pair. Iran launched over 200 ballistic missiles at Israel on Tuesday, while the latter conducted a precise air strike and bombed central Beirut in Lebanon during the early hours of Thursday, raising the risk of a full-blown war and undermining the risk sentiment.
The JPY bulls, however, refrain from placing aggressive bets in the wake of the uncertainty over future interest rate hikes by the Bank of Japan (BoJ). In fact, Japan's new Prime Minister Shigeru Ishiba said on Wednesday that the country is not in an environment for an additional rate increase. Adding to this, Japan's newly appointed economy minister, Ryosei Akazawa, expects the BoJ to make careful economic assessments when raising interest rates again.
Furthermore, BoJ board member Asahi Noguchi stated that the central bank must patiently maintain loose monetary conditions and will make gradual adjustments while carefully assessing whether inflation sustainably reaches the 2% target. This, in turn, warrants some caution before positioning for any further depreciating move for the GBP/JPY cross and supports prospects for an extension of the range-bound price action witnessed since the beginning of the current week.
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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