The pound to Japanese yen pair held steady on Monday morning ahead of the upcoming Bank of England (BoJ) and Bank of England (BoE) interest rate decisions. The GBP/JPY exchange rate rose to 194, up from this month’s low of 188.05.
Bank of Japan interest rate decision
The GBP/JPY pair rose on Monday after the encouraging economic data from Japan. According to the statistics agency, core machinery orders rose by 2.1% in October, higher than the median estimate of 1.2%. It was also a higher increase from the 0.7% contraction in the previous month.
The core machinery orders rose by 5.6% on a YoY basis, also higher than the previous month’s increase of 0.7%. These numbers mean that the economy was doing well. On Friday, another report showed that Japan’s industrial production rose by 2.8% in October, higher than the previous 1.6%.
Data by S&P Global showed that Japan’s manufacturing PMI rose from 49 in November to 49.5 in December, higher than the median estimate of 49.2. The services PMI data rose from 50.5.
These are important numbers because they came as the market waits for Friday’s Bank of Japan interest rate decision.
Economists expect the bank to hike interest rates again in this meeting. A 0.25% hike will bring the official cash rate to 0.5%, the highest level in decades.
The BoJ is mostly concerned about inflation, which has remained higher in the past few months. The most recent data showed that the headline Consumer Price Index (CPI) slowed from 2.5% in October to 2.3% in November. It has retreated from the pandemic high of over 4.8%.
Japan’s inflation has remained higher because of the energy prices and the depreciating currency.
Bank of England decision
The GBP/JPY pair will also be in the spotlight as the UK releases important inflation data and as the Bank of England delivers the final decision of the year.
Economists polled by Reuters expect the data to show that the UK inflation rate rose slightly in November. Precisely, they expect the headline CPI figure to move from 2.3% to 2.6%, and the core CPI to move from 3.3% to 3.6%.
These numbers will be much higher than the Bank of England’s target of 2.0%. However, with the economy slowing, the bank will likely decide to cut interest rates in its meeting on Thursday.
The risk is that, while a rate cut may stimulate the economy, there is a risk that it will lead to higher inflation in the near term.
The BoJ and BoE actions mean that the carry trade opportunity that has existed for years is no longer viable. In this, Japan investors used to move to higher-yielding countries like the UK as the country remained in negative rates.
GBP/JPY technical analysis
GBP/JPY chart by TradingView
The GBP to JPY exchange rate has been in a slow uptrend in the past few days. It has moved to the 23.6% Fibonacci Retracement level at 194.34. Also, the pair has moved slightly above the important support at 188, its lowest swing on December 3.
The pair has remained at the 50-day and 100-day Exponential Moving Averages (EMA), while the Relative Strength Index (RSI) has pointed upwards. Therefore, the pair will likely continue rising as bulls target the next key resistance point at 200. On the flip side, a drop below the support at 192 will invalidate the bullish view and point to a drop to 188.
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