GBP/JPY extends losses to near 191.00 due to increased risk aversion

• GBP/JPY faces challenges as US President-elect Donald Trump's renewed tariff threats have dampened market sentiment.
• The Pound Sterling may gain ground due to the hawkish mood surrounding the BoE policy decision next month.
• BoE Deputy Governor Lombardelli requires more evidence of easing inflation before supporting another rate cut.

GBP/JPY continues its losing streak for the fifth successive session, trading around 191.10 during the European hours on Wednesday. Investors will focus on the Tokyo Consumer Price Index (CPI) data for October, which will be published on Friday.

The downside risk for the GBP/JPY cross appears due to the increased risk aversion following US President-elect Donald Trump's renewed tariff threats, which have dampened market sentiment, contributing support for the safe-haven Japanese Yen (JPY).

However, the upside of the JPY could be retrained as traders dial back expectations for the Bank of Japan (BoJ) to hike interest rates in December. Market participants expect that political uncertainty in Japan limits BoJ’s potential for raising its key borrowing rates further.

Last week, BoJ Governor Kazuo Ueda hinted last week at the possibility of another interest rate hike as early as December. Japanese Prime Minister Shigeru Ishiba said on Tuesday that he would ask companies to implement significant wage hikes at the annual "Shuntō" negotiations next spring.

The downside of the GBP/JPY cross could be limited as the Pound Sterling (GBP) receives support from reduced expectations that the Bank of England (BoE) will cut interest rates in December. Most BoE policymakers favor a gradual approach to easing monetary policy. Bank of England’s Financial Stability Report will be eyed on Friday.

BoE Deputy Governor Clare Lombardelli stated on Tuesday that she needs to see further evidence of cooling price pressures before endorsing another interest rate cut. Lombardelli also noted that US trade tariffs pose a potential risk to economic growth, though it is too early to fully gauge their impact.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

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