GBP/JPY corrects from a new multi-year top under pressure from the JPY’s resurgent demand.
The benchmark 10-year JGB yield increases to a nine-year high, supporting the JPY.
For aggressive bearish traders, the contrasting BoJ-BoE monetary policy position calls for prudence.
After reaching its highest level since November 2015 on this Tuesday, the GBP/JPY cross draws some intraday selling and stays weak during the early European session. Spot prices are currently trading around the 186.30 level, down slightly more than 0.10% on the day, but any appreciable corrective decrease is still difficult to predict.
The yield on the 10-year Japanese government bond (JGB) reaches a fresh nine-year high on Tuesday, pushing flows towards the Japanese Yen (JPY), which is a result of higher pressure on global interest rates. Further supporting the JPY and acting as a barrier for the GBP/JPY cross are rumours that the recent weakening in the local currency may spark some jawboning from authorities or an intervention in the foreign exchange markets.
It is important to remember that Masato Kanda, Japan’s senior FX diplomat, declared last week that he will take proper action to stop erratic currency movements. Additionally, the People’s Bank of China (PBoC) reduced its rate on Monday, signalling limited policy support for the economy and doing nothing to allay concerns about a worsening crisis in China’s real estate market. As a result, the JPY gains from its role as a safe haven currency and the GBP/JPY pair has pulled back by more than 50 pip.
However, the dovish attitude of the Bank of Japan (BoJ) may prevent the JPY from making any further advances. In actuality, the BoJ is the only national bank in existence to keep its benchmark interest rate negative. Additionally, officials have highlighted that in order to even consider removing the enormous monetary stimulus, a sustainable salary increase is a requirement. This represents a significant departure from the Bank of England’s (BoE) August increase to a 15-year high for its benchmark rate.
Furthermore, the present market pricing suggests that there is a greater than 80% possibility that the next BoE policy meeting in September will result in a 25 bps lift-off. The fact that salaries in the UK reached a fresh record growth rate in the second quarter increased the bets, raising concerns about long-term inflation even after 14 straight rate increases. Additionally, the positive UK GDP data and marginally higher UK CPI print increase the likelihood of additional policy tightening by the BoE.
The fundamental background outlined above leads one to believe that the path of least resistance for the GBP/JPY cross is upward. As a result, any further decline may still be viewed as a buying opportunity and is more likely to be contained in the lack of any important economic news that may have influenced the market on Tuesday. Before the important Jackson Hole Symposium later this week and the flash PMI prints on Wednesday, traders could also opt to stay out of the market.
