GBP/JPY climbs to 189.00 amid modest JPY weakness; upside potential seems limited
- GBP/JPY rebounds after retesting a multi-month low at the start of a new week.
- The strong recovery is sponsored by the emergence of selling around the JPY.
- The divergent BoJ-BoE expectations might cap any further gains for the cross.
The GBP/JPY cross stages a goodish intraday recovery from the 187.00 neighborhood, or its lowest level since September 2024 retested earlier this Monday and builds on its ascent through the first half of the European session. Spot prices advance to the 189.00 mark in the last hour and for now, seem to have snapped a three-day losing streak.
US President Donald Trump's fresh tariff threats revive fears that Japan would also be an eventual target of new US levies, which, in turn, undermines the Japanese Yen (JPY) and prompts some short-covering around the GBP/JPY cross. However, hawkish Bank of Japan (BoJ) expectations and concerns about a global trade war hold back bearish traders from placing aggressive bets around the safe-haven JPY.
Kazuhiro Masaki, Director General of the BoJ's monetary affairs department, said last Thursday that the central bank will continue to raise interest rates if underlying inflation accelerates toward its 2% target as projected. This comes on top of data showing that Japan’s inflation-adjusted real wages rose for the second straight month and backs the case for further tightening by the Japanese central bank.
This marks a big divergent in comparison to the Bank of England's (BoE) gloomy outlook, which, in turn, should contribute to capping the GBP/JPY cross. The UK central bank lowered its benchmark interest rate by 25 basis points last week and downgraded the growth forecast for 2025. Moreover, BoE Governor Andrew Bailey said that the central bank expects to make further rate cuts this year.
In the absence of any relevant economic data, the aforementioned fundamental backdrop makes it prudent to wait for strong follow-through buying before confirming that the GBP/JPY cross has bottomed out in the near term. Traders now look forward to BoE Governor Andrew Bailey's speech on Tuesday, which will play a key role in influencing the British Pound (GBP) and provide a fresh impetus.
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, also known as ‘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.