- The GBP/JPY exhibited resilience during Friday's trading session, recovering from an initial pullback as buyers reentered the market.
- This highlights the pound's strength compared to the Japanese yen, largely due to the divergent monetary policies pursued by the Bank of Japan and the British authorities.
- With the Bank of Japan maintaining its commitment to quantitative easing, the British pound is expected to continue its ascent, potentially reaching or surpassing the ¥175 level in the near future.
While the British government remains focused on combating inflation, the Bank of Japan has demonstrated its dedication to loose monetary policy. The Bank has consistently emphasized its intention to keep the interest rates on the 10-year Japanese Government Bonds (JGB) at or below 50 basis points. To achieve this, they will continue to inject more yen into the market, thereby increasing the supply. In contrast, the British authorities are tightening their monetary policy. The interest rate differential between the two currencies alone suggests that this currency pair will experience a long-term upward trajectory.
The Yen is Likely to Weaken
During pullbacks, ample buyers are expected to step in, as demonstrated in recent trading sessions. The 50-day Exponential Moving Average (EMA) is a crucial indicator in the vicinity of the ¥167.50 level, which is likely to play a significant role in providing support. Over time, this market should continue to attract value hunters whenever the British pound dips slightly, presenting a favorable buying opportunity. Conversely, the Japanese yen is poised to weaken further, as a country can either tighten monetary policy to combat inflation and strengthen its currency or choose not to, leading to currency depreciation. This conundrum has left the Japanese economy in a vulnerable position after years of quantitative easing. With this in mind, it is not far-fetched to imagine this currency pair surpassing the ¥200 level in the future.
TL;DR: the British pound is anticipated to beat up the Japanese yen as their monetary policies diverge. The Bank of Japan's commitment to quantitative easing and loose monetary policy contrasts with the British government's focus on combating inflation and tightening monetary policy. This discrepancy, coupled with the interest rate differential, supports a bullish outlook for this currency pair. Buyers are expected to emerge during pullbacks, particularly around the ¥167.50 level, driven by the pound's relative strength. Conversely, the yen is likely to weaken further due to Japan's policy choices. The pair could surpass the ¥200 level with enough time, highlighting the ongoing disparity between the two currencies.
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