GBP/JPY Surges to a Three-Week High of 182.80-182.85 on Broad JPY Weakness

The GBP/JPY pair has seen a significant rise for the second consecutive day on Monday, reaching a three-week high in the early European trading session. The pair is currently hovering around the 182.80-182.85 region, a surge of over 650 pips from Friday’s lowest point since June 13. This upward trend is largely due to the widespread weak performance of the Japanese Yen (JPY).

Indeed, the JPY is one of the worst-performing currencies among the G-10 and is under pressure due to an unexpected operation by the Bank of Japan to purchase ¥300 billion ($2 billion) worth of Japanese government bonds (JGB). This marks the first such operation since February 2022 and comes after a notable increase in the yield of 10-year benchmark JGB to a nine-year high, triggered by the BoJ’s decision to introduce more flexibility into its Yield Curve Control (YCC) policy last Friday. The BoJ stated that the 0.5% cap for the 10-year JGB yield will now be considered “references” rather than “fixed limits”.

However, initial reactions to this move have been short-lived as markets appear disappointed by dovish comments from BoJ Governor Kazuo Ueda, who reiterated the necessity of maintaining monetary support. In a post-meeting press conference, Ueda stated the central bank would not hesitate to implement further easing policies and emphasized that more time was needed to achieve the 2% inflation target sustainably. These factors, combined with a generally positive sentiment across global equity markets, have led to a decrease in the safe-haven appeal of the JPY and provided a substantial boost to the GBP/JPY pair.

Investors remain optimistic about potential stimulus measures from China, which helps balance data indicating a further decline in business activity in the world’s second-largest economy in July. Additionally, the market’s growing belief that the Federal Reserve (Fed) is nearing the end of its quickest interest rate hiking cycle since the 1980s continues to support the risk-on environment. Expectations of further interest rate hikes by the Bank of England (BoE) also contribute to the relatively strong performance of the British Pound and continue to drive the GBP/JPY pair higher.

The UK central bank is widely expected to raise its benchmark interest rate by 25 basis points on August 3, bringing it to 5.25%, the highest level since early 2008. Furthermore, the market is pricing in two additional BoE rate hikes by year-end due to sustained price pressures. This stark contrast with the BoJ’s dovish stance suggests that the GBP/JPY pair is likely to continue its upward trajectory. Sustained strength and acceptance above the mid-182.00s further validate the positive outlook, suggesting potential for further appreciation in the near term.