GBP/JPY holds positive ground above 188.50 ahead of BoE rate decision

• GBP/JPY gathers strength around 188.65 in Thursday’s early European session. 
• The BoE will announce its interest rate decision on Thursday, with market participants widely expecting the rate to remain unchanged. 
• The markets expect no change at the September BoJ meeting, which concludes Friday.

The GBP/JPY cross trades in positive territory for the fourth consecutive day near 188.65 on Thursday during the early European session. The weakening of the Japanese Yen (JPY) drags the cross lower. The Bank of England (BoE) will announce its interest rate decision later on Thursday. On Friday, all eyes will be on the Bank of Japan (BoJ) monetary policy meeting. 

The BoE is expected to hold the interest rate at 5.0% at its September meeting on Thursday as UK Consumer Price Index (CPI) inflation remained at 2.2% in August, above the central bank's 2% target. Rob Wood, chief UK economist at economic research consultancy Pantheon Macroeconomics, said the inflation data released on Wednesday gave the BoE "little reason to rush to cut interest rates again" on Thursday. 

The financial market expects the BoE to delay a second rate cut until November. However, if the UK central bank surprises a rate cut, it might cause the Pound Sterling (GBP) to weaken significantly.

The BoJ is anticipated to maintain its target range for short-term interest rates at 0% to 1% on Friday. “Since the BOJ decision is expected to remain unchanged, attention is likely to focus on Governor Ueda’s subsequent remarks,” said Rina Oshimo, a senior strategist at Okasan Securities Co. Additionally, Japan’s National Consumer Price Index (CPI) data will be closely monitored, as it might offer some hints about the BoJ’s future interest rate path.

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 has embarked in an ultra-loose monetary policy since 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.

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

The Bank’s massive stimulus has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation. The BoJ’s policy of holding down rates has led to a widening differential with other currencies, dragging down the value of the Yen.

Is the Bank of Japan’s ultra-loose policy likely to change soon?

A weaker Yen and the spike in global energy prices have led to an increase in Japanese inflation, which has exceeded the BoJ’s 2% target. With wage inflation becoming a cause of concern, the BoJ looks to move away from ultra loose policy, while trying to avoid slowing the activity too much.

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