British Pound flatlines vs Yen amid looming intervention risks; downside seems cushioned
- GBP/JPY lacks a firm intraday directional bias and oscillates in a range on Friday.
- Intervention fears and BoJ rate hike bets support the JPY, capping spot prices.
- The wide Japan-UK rate differential acts as a tailwind and limits the downside.
The GBP/JPY cross seesaws between tepid gains and minor losses on Friday, trading around mid-211.00s during the early European session, just above a one-and-a-half-week low, which it touched the previous day. Spot prices, however, remain confined within a one-week-old range as traders remain on high alert amid speculation that authorities will step in again to support the Japanese Yen (JPY).
In fact, Japan’s top currency diplomat, Atsushi Mimura, warned on Thursday that recent currency movements had been too fast and reminded markets that it was too early to forget the summer intervention. Moreover, Japan's Finance Minister Satsuki Katayama signaled that authorities are monitoring one-sided, swift FX moves, adding that the government will respond appropriately to currency volatility and will engage with the US Treasury. Adding to this, rising bets for an imminent rate hike by the Bank of Japan (BoJ) support the JPY and cap the GBP/JPY cross.
Investors, however, remain uncertain about the likely timing and the pace of BoJ rate hikes. This, along with the wide interest rate differential between Japan and other major economies, including the UK, keeps the so-called carry trade active and holds back traders from placing bullish bets on the JPY. The BoJ policy rate is at 1.25%, while the Bank of England (BoE) raised its base rate to 4.00%, leaving a gap of 275 basis points. Moreover, traders are pricing in another BoE rate hike in December, preserving the yield advantage for the GBP and supporting the GBP/JPY cross.
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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