GBP/JPY slides below 192.00 to hit fresh daily low, downside potential seems limited

• GBP/JPY struggles to capitalize on its modest intraday gains beyond the 200-day SMA.
• The GBP is pressured by a modest USD strength and acts as a headwind for the cross.
• The BoJ rate hike uncertainty keeps the JPY bulls on the defensive and lends support.

The GBP/JPY cross attracts some intraday sellers on Tuesday and retreats over 100 pips from the daily peak, around the 159.35 region amid the emergence of some selling around the British Pound (GBP). Spot prices drop to a fresh daily low during the early European session and currently trade just below the 192.00 mark, down nearly 0.20% for the day.

The US Dollar (USD) gains follow-through traction in the wake of the Federal Reserve (Fed) Chair Jerome Powell's overnight hawkish remains and turns out to be a key factor weighing on the British Pound (GBP). Apart from this, the intraday GBP fall lacks any obvious fundamental catalyst and is likely to remain limited amid expectations that the Bank of England's (BoE) rate-cutting cycle is likely to be slower than in the US and the Eurozone. This, along with the offered tone surrounding the Japanese Yen (JPY), should help limit the downside for the GBP/JPY cross. 

Japan's incoming Prime Minister (PM) Shigeru Ishiba expressed a cautious view about interest rate hikes by the Bank of Japan (BoJ) and said on Monday that he intends to call a general election on October 27. This, along with the optimism over a stimulus bonanza from China, undermines the safe-haven JPY and acts as a tailwind for the GBP/JPY cross. Spot prices, meanwhile, move little following the release of the final UK Manufacturing PMI, which was revised up to 45.0 for September as compared to the 44.8 flash print and the previous month's reading.

Nevertheless, the aforementioned fundamental backdrop makes it prudent to wait for a strong follow-through selling before positioning for any meaningful downside for the GBP/JPY cross. From a technical perspective, the recent repeated failures to find acceptance above the very important 200-day Simple Moving Average (SMA) and the formation of a  'Death Cross' on the daily chart – the 50-day SMA crossing below the 200-day SMA – warrant caution for aggressive bullish traders.

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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