November 20, 2024
- A mix of expected UK data boosts GBP/JPY and less safe haven flows into the JPY.
- UK inflation data beat expectations, raising bets the Bank of England will leave interest rates relatively high.
- The difference between the two countries’ interest rates – 4.75% for the UK and 0.25% for Japan, lends a bullish bias to the pair.
GBP/JPY traded almost two-thirds higher at 197.30s on Wednesday, after the release of expected UK inflation data cemented bets the Bank of England (BoE) will leave its key interest rate at a relatively high 4.75% at its December policy meeting, and Take a gradual approach to lower interest rates in the future. Since higher interest rates usually increase foreign capital inflows, thereby strengthening a currency, the news helps lift pound Sterling (GBP), and GBP/JPY led to gains.
UK Consumer Price Index (CPI) inflation gauge rose 2.3% in October, better than September’s 1.7%, and expectations of 2.2%. Core CPI inflation rose to 3.3% from 3.2% earlier and 3.1% expected.
Following the CPI release, the market’s underlying trajectory for UK interest rates shows that the BoE’s bank rate is likely to cut by 15 basis points (bps) (0.15%) over the next three months and 60 pbs over the next 12 months. This suggests the BoE is unlikely to cut 25 bps in December, according to Rabobank.
Meanwhile, the Japanese yen (JPY) lost ground on Wednesday as safe-haven flows eased on the back of improving risk appetite. The yen strengthened temporarily on Tuesday as geopolitical risks rose. Its source was Russia’s announcement that it had lowered its nuclear weapons ban. The move was interpreted as a warning in response to the US allowing Ukraine to use US-made missiles to hit targets in Russia.
Uncertainty over when the Bank of Japan (BoJ) will raise its key interest rate from a relatively low 0.25% is capping upside potential for the yen, while providing a boost for the GBP/JPY pair due to a large differential that supports inflows. pounds
Japanese Finance Minister Katsunobu Kato on Tuesday He said is to “closely monitor FX movements with great urgency.” This suggests a risk that the authorities are planning an intervention to support the yen. However, according to Bloomberg News, the yen is actually still relatively strong on a trade-weighted basis compared to the level it fell to in July 2024 when Japanese authorities made a direct market intervention to support their currency.
