The GBP/JPY currency pair nosedived to its lowest level in two months after the Bank of England (BoE) lowered interest rates while signaling a cautious and gradual approach to future cuts. The BoJ, on the other hand, is seen as increasingly likely to raise rates further this year.
The GBP/JPY currency pair experienced a significant sell-off on Thursday, plummeting to near 188.40 in the North American session, marking its lowest point in two months. This sharp decline followed the Bank of England's (BoE) monetary policy meeting, where the central bank lowered its key borrowing rate by 25 basis points (bps) to 4.5%.
Although a rate cut was anticipated, the 8-1 vote split in favor of the reduction, with two members endorsing a larger 50 bps cut, surprised market participants. This dovish stance from the BoE, coupled with Governor Andrew Bailey's indication of a cautious and gradual rate cut approach, contributed to the GBP's weakness.Bailey emphasized that while the UK headline Consumer Price Index (CPI) might temporarily rise to 3.7%, it is projected to return to its downward trajectory towards the BoE's 2% target. Despite avoiding a commitment to a predetermined rate-cut path, Bailey's comments fueled dovish expectations that the BoE will implement further rate reductions this year. Prior to the BoE meeting, traders had fully priced in two rate cuts for the entire year. However, the outcome of the meeting has intensified speculation of three or more cuts in 2023.Meanwhile, the Japanese Yen (JPY) exhibited strength across the board, driven by mounting expectations that the Bank of Japan (BoJ) will continue to raise interest rates this year. These hawkish bets were bolstered by board member Naoki Tamura's statement that interest rates should rise to at least 1% by the second half of the fiscal year beginning in April. Tamura's projection relies on the assumption of widespread wage increases, which would elevate price pressures. In contrast, the BoE's dovish stance and the potential for further rate cuts have weakened the British Pound against the Japanese Yen
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