GBP/JPY posts modest gains near 205.50 ahead of UK CPI data

GBP/JPY trades with mild gains around 205.50 in Wednesday’s Asian session.
Investors will closely monitor the UK June CPI data on Wednesday.
Japan’s Tankan Manufacturers Sentiment Index showed the first gain in four months, indicating a pickup in economic activity.

The GBP/JPY cross trades on a stronger note near 205.50 during the Asian session on Wednesday. The selling pressure around the Japanese Yen (JPY) provides some support to the cross. Traders will closely watch the UK Consumer Price Index (CPI) for June, which is due on Wednesday. This data could offer some insight into the UK interest rate path.

The encouraging UK growth numbers last week helped push back against the timing of the Bank of England’s (BoE) first rate cut. Meanwhile, BoE’s external member of the Monetary Policy Committee, Swati Dhingra, said on Monday that the central bank should cut the interest rate at its next meeting on 1 August to ease pressure on households and businesses. Dhingra, the most dovish member of the MPC, believes that inflation is unlikely to rise sharply again.

The UK CPI data will be in the spotlight later in the day. The UK CPI inflation is expected to tick down to 0.1% MoM in June from 0.3% in May, while annualized CPI inflation is expected to hold steady at 2.0% YoY. An upside surprise to the reading could push back against a rate cut next month and lift the Cable against the JPY.

On the other hand, further foreign exchange (FX) intervention from Japanese authorities might support the JPY and cap the upside for the cross. Data released on Tuesday showed that the Bank of Japan (BoJ) intervened in the FX market on two consecutive trading days last Thursday and Friday.

Furthermore, the recent data showed a pickup in economic activity in Japan. Japan’s Tankan Manufacturers Sentiment Index rose to 11.0 in July from 6.0 in June. This figure registered the first gain in four months.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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