GBP/JPY trims a part of intraday losses, keeps the red below mid-191.00s

• GBP/JPY remains under some selling pressure for the second straight day on Friday. 
• BoE Governor Bailey’s dovish remarks on Thursday continue to undermine the GBP.
• Geopolitical risks benefit the safe-haven JPY and further exert pressure on the cross.
• The BoJ rate hike uncertainty cap gains for the JPY and limits losses for spot prices. 

The GBP/JPY cross finds some near the 191.70 region on Friday and for now, seems to have stalled the overnight sharp pullback from a one-week high – levels beyond the 195.00 psychological mark. Spot prices, however, remain in negative territory for the second straight day and currently trade just below mid-192.00s, down nearly 0.25% for the day.

The British Pound (GBP) continues to be undermined by the overnight dovish remarks by the Bank of England (BoE) Governor Andrew Bailey, saying that there was a chance that the central bank could become a bit more aggressive in cutting rates if there's further good news on inflation. Furthermore, geopolitical risks stemming from the ongoing conflicts in the Middle East drive some haven flows towards the Japanese Yen (JPY) and contribute to the offered tone surrounding the GBP/JPY cross. 

Meanwhile, Asahi Noguchi, a dovish Bank of Japan (BoJ) board member said on Thursday that the central bank has scope to raise interest rates further but must move cautiously and slowly to avoid hurting the economy. This, in turn, further underpins the JPY, though the uncertainty over future interest rate hikes by the BoJ limits the downside for the GBP/JPY cross. Japan's new Prime Minister Shigeru Ishiba said this week that Japan is not in an environment for an additional rate increase.

Furthermore, Japan's Economy Minister Ryosei Akazawa stated that the PM and the BoJ both agree that overcoming deflation is Japan's highest priority. Adding to this, BoE's Chief Economist Huw Pill said this Friday that it will be important to guard against the risk of cutting interest rates either too far or too fast. This assists the GBP/JPY cross to rebound around 70-80 pips from the daily swing low. That said, the lack of any follow-through buying warrants some caution for bullish traders.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.

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