GBP/JPY rebounds over 100 pips from one-week low, climbs back closer to 191.00 mark

• GBP/JPY stages a solid intraday recovery from over a one-week trough touched earlier this Monday.
• A combination of factors weighs on the JPY and lends support to the cross amid a modest GBP uptick.
• The divergent BoJ-BoE policy expectations warrant caution before placing aggressive bullish bets.

The GBP/JPY cross attracts some dip-buyers in the vicinity of mid-189.00s, or a one-week low and for now, seems to have stalled its retracement slide from a nearly two-month peak touched on Friday. The move up lifts spot prices to the 191.00 neighborhood, back closer to the daily peak during the early European session, though the fundamental backdrop warrants some caution for bullish traders. 

The Japanese Yen (JPY) weakens in reaction to comments from Japan's incoming Prime Minister (PM) Shigeru Ishiba, saying that the Bank of Japan's (BoJ) monetary policy must remain accommodative to underpin a fragile economic recovery. This, along with news that the new PM is planning a general election for October 27 and mixed Japanese economic data, continues to undermine the JPY and lends support to the GBP/JPY cross. 

Meanwhile, the British Pound (GBP) draws support from a subdued US Dollar (USD) demand and expectations that the Bank of England's (BoE) rate-cutting cycle is likely to be slower than in the US. This turns out to be another factor acting as a tailwind for the GBP/JPY cross. That said, the growing market conviction that the BoJ will hike interest rates again by the end of this year should help limit any meaningful JPY losses.

Apart from this, the risk of a further escalation of geopolitical tensions in the Middle East should benefit the safe-haven JPY and contribute to capping the GBP/JPY cross. Israel expanded its confrontation with Iran's allies and launched aggressive aerial assaults on Sunday against Houthis in Yemen and Hezbollah in Lebanon. This, in turn, fuels concerns that the fighting could spin out of control and trigger an all-out war in the region.

From a technical perspective, the 50-day Simple Moving Average (SMA) crossed below the very important 200-day SMA earlier this month, forming a bearish 'Death Cross' on the daily chart. This further makes it prudent to wait for strong follow-through buying before positioning for the resumption of the recent goodish recovery from the monthly low in the absence of any relevant market-moving economic releases on Monday.

Bank of Japan FAQs

What is the Bank of Japan?

The Bank of Japan (BoJ) is the Japanese central bank, which sets monetary policy in the country. Its mandate is to issue banknotes and carry out currency and monetary control to ensure price stability, which means an inflation target of around 2%.

What has been the Bank of Japan’s policy?

The Bank of Japan embarked in an ultra-loose monetary policy in 2013 in order to stimulate the economy and fuel inflation amid a low-inflationary environment. The bank’s policy is based on Quantitative and Qualitative Easing (QQE), or printing notes to buy assets such as government or corporate bonds to provide liquidity. In 2016, the bank doubled down on its strategy and further loosened policy by first introducing negative interest rates and then directly controlling the yield of its 10-year government bonds. In March 2024, the BoJ lifted interest rates, effectively retreating from the ultra-loose monetary policy stance.

How do Bank of Japan’s decisions influence the Japanese Yen?

The Bank’s massive stimulus caused the Yen to depreciate against its main currency peers. This process exacerbated in 2022 and 2023 due to an increasing policy divergence between the Bank of Japan and other main central banks, which opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy led to a widening differential with other currencies, dragging down the value of the Yen. This trend partly reversed in 2024, when the BoJ decided to abandon its ultra-loose policy stance.

Why did the Bank of Japan decide to start unwinding its ultra-loose policy?

A weaker Yen and the spike in global energy prices led to an increase in Japanese inflation, which exceeded the BoJ’s 2% target. The prospect of rising salaries in the country – a key element fuelling inflation – also contributed to the move.

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