- GBP/JPY extends its losses due to rising expectations of the BoE delivering a 25 basis points rate cut on Thursday.
- The BoE’s MPC is expected to vote 8-1 in favor of a quarter-point rate cut, bringing the rate down to 4.5%.
- The robust wage and services data in Japan has bolstered hawkish sentiment surrounding the BoJ’s rate hikes.
GBP/JPY continues to lose ground for the second consecutive day, trading around 190.40 during the early European hours on Thursday. The GBP/JPY cross struggles as the Pound Sterling (GBP) faces downward pressure amid expectations that the Bank of England (BoE) will resume its policy-easing cycle, likely lowering interest rates by 25 basis points (bps) to 4.5% at its policy meeting later in the day.
The BoE’s Monetary Policy Committee (MPC) is anticipated to vote 8-1 in favor of a quarter-point rate cut to 4.5%, with MPC member Catherine Mann, who has been an outspoken hawk, is expected to support keeping interest rates steady at 4.75%.
The inflationary pressures in the United Kingdom (UK) decelerated at a faster-than-expected pace in December. Inflation in the services sector – which is closely tracked by BoE officials – grew at a moderate pace of 4.4%, compared to 5% growth in November.
The Japanese Yen (JPY) strengthens against its peers as robust wage and services data fuel expectations of a more hawkish Bank of Japan (BoJ). Data showed that real wages in Japan increased for the second straight month in December, while nominal wage growth reached its highest level in nearly three decades.
Japan’s Finance Minister, Katsunobu Kato, told parliament on Thursday that deflation has not yet ended. Kato also noted ongoing inflationary conditions as prices continue to rise.
Société Générale’s FX analysts noted that the Japanese Yen is outperforming, while 10-year JGB yields have risen to nearly 1.30%, the highest level since April 2011. However, with the BoJ policy rate expected to peak around 1.00% over the next two years, the upside for both JPY and JGB yields remains limited.
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.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers. The author will not be held responsible for information that is found at the end of links posted on this page.
If not otherwise explicitly mentioned in the body of the article, at the time of writing, the author has no position in any stock mentioned in this article and no business relationship with any company mentioned. The author has not received compensation for writing this article, other than from FXStreet.
FXStreet and the author do not provide personalized recommendations. The author makes no representations as to the accuracy, completeness, or suitability of this information. FXStreet and the author will not be liable for any errors, omissions or any losses, injuries or damages arising from this information and its display or use. Errors and omissions excepted.
The author and FXStreet are not registered investment advisors and nothing in this article is intended to be investment advice.