- GBP/JPY continues losing ground for the third successive day on Thursday.
- The BoE-BoJ policy divergence is seen as a key factor weighing on the cross.
- A positive risk tone helps limit further losses ahead of the key BoE decision.
The GBP/JPY cross remains under heavy selling pressure for the third straight day and drops to sub-191.00 levels or the lowest since April 23 on Thursday. Spot prices, however, manage to rebound a few pips and currently trade around mid-191.00s as traders prefer to wait on the sidelines ahead of the Bank of England (BoE) policy meeting.
Signs that inflationary pressures are receding globally have been fueling speculations that the UK central bank will cut interest rates later today. In fact, financial markets are pricing in over a 65% chance that the BoE will lower rates from a 16-year high of 5.25% and expect one more quarter-point cut before the end of the year. This, along with a strong pickup in the US Dollar (USD) demand, undermines the British Pound (GBP) and weighs on the GBP/JPY cross.
The Japanese Yen (JPY), on the other hand, continues to draw support from the Bank of Japan's (BoJ) decision to hike the benchmark short-term rate on Wednesday, by 15 basis points - the top end of market expectations. Moreover, official data showed that Japanese authorities spent ¥5.53 trillion ($36.8 billion) intervening in the foreign exchange market in July, which further benefits the JPY and contributes to the offered tone surrounding the GBP/JPY cross.
The fundamental backdrop, along with an intraday slide below the very important 200-day Simple Moving Average (SMA), suggests that the path of least resistance for spot prices is to the downside. Heading into the key central bank event risk, bearish traders seem reluctant to place fresh bets amid a positive risk tone, which tends to dent demand for the safe-haven JPY.
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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