GBP/JPY plummets to over three-week low, closer to mid-187.00s amid notable JPY strength

GBP/JPY dives to a fresh multi-week low amid sustained buying surrounding the JPY.
Hawkish BoJ expectations, along with a softer risk tone, underpin the safe-haven JPY.
A decisive break below the 188.00 mark supports prospects for further depreciation.

The GBP/JPY cross attracts fresh sellers during the Asian session on Friday and slides further below the 188.00 mark, hitting a three-and-half-week low in the last hour.

This marks the third day of a negative move in the previous four and is sponsored by some follow-through buying surrounding the Japanese Yen (JPY), which continues to be underpinned by hawkish Bank of Japan (BoJ) expectations. In fact, BoJ Governor Kazuo Ueda reiterated earlier this week that the central bank will continue to raise interest rates if the economy and prices perform as expected.

Adding to this, BoJ Board Member Hajime Takata said on Thursday that we must adjust monetary conditions by another gear if we can confirm that firms will continue to increase capital expenditure, wages, and prices. Furthermore, data released on Thursday showed that real wages in Japan unexpectedly rose for the second straight month in July, keeping the BoJ on track for another potential rate hike in 2024.

Meanwhile, a mixed bag of employment data released from the United States (US) this week triggered worries about the health of the economy. This, along with persistent geopolitical tensions, tempers investors' appetite for riskier assets, which is seen as another factor underpinning the safe-haven JPY and exerting additional downward pressure on the GBP/JPY cross amid the lack of any buying around the British Pound (GBP).

With the latest leg down, spot prices confirm an intraday breakdown through the 189.00 horizontal support and a subsequent slide below the 188.00 mark favors bearish traders. Moreover, oscillators on the daily chart are holding in negative territory and are still away from being in the oversold zone. This suggests that the path of least resistance for the GBP/JPY cross is to the downside and supports prospects for further losses.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan has embarked in an ultra-loose monetary policy since 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus 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. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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