The British pound finds itself somewhat flat on the day against the Japanese yen after several sessions of sharp selling. Today’s range has been roughly between ¥207.75 and ¥208.30.
The pair has fallen from the area just above the ¥216 level at the start of September, so the larger short-term move remains decisively lower even though price is now consolidating.
The yen side is, without a doubt, the dominant driver as markets are increasingly expecting the Bank of Japan to hike to 1.25% on September 18, and Bank of Japan board member Masu warned today that rates may need to rise more rapidly if inflation accelerates. This is a major change for a cross that historically benefited from the carry trade differential.
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Recent intervention has changed the psychology around the Japanese yen
The Japanese have spent roughly ¥15.4 trillion buying their own currency in the latest intervention episode. The move has encouraged carry trade reduction across all yen crosses, including this one.
Sterling itself is not necessarily weak today. The British pound is holding around 1.3550 against the dollar, while UK gilt yields are surging. The UK 10-year yield has reached the 5.35% level, which would ordinarily offer the British pound some support. That being said, the weakness is much more about Japanese yen strength than anything else.
As things stand right now, economists are starting to see additional hikes after this next one with the Bank of Japan. Meanwhile, the Bank of England is expected to remain relatively patient, and that will matter because the interest rate differential will start to shrink, and we are repricing that.
All of that being said, the GBP/JPY trend right now looks pretty bearish, but it also looks like the ¥207 level is somewhat supportive. So, a bounce from here would not be the craziest outcome. Whether or not we can break above ¥210 is a completely different question. If we fall from here, the ¥205 level will almost certainly be in focus.
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