GBP/JPY drops near 192.00 as risk aversion rises

  • GBP/JPY falls as traders remain cautious ahead of the release of the US ISM manufacturing PMI on Tuesday.
  • JPY may face challenges as weak Japanese manufacturing data fuels expectations that the BoJ will postpone further rate hikes.
  • BRC’s comparable retail sales rose 0.8% year-on-year in August, up from a previous increase of 0.3%.

GBP/JPY snaps its three-day winning streak, trading around 191.80 during European hours on Tuesday. However, the JPY encountered challenges as weak Japanese manufacturing data fueled speculation that the Bank of Japan (BoJ) could postpone further rate hikes.

On Tuesday, Japan announced the allocation of ¥989 billion to fund energy subsidies in response to rising energy costs and resulting cost-of-living pressures. Such government intervention could potentially contribute to inflation.

The Bank of Japan’s (BoJ) hawkish monetary policy stance has been reinforced by a recent surge in inflation in Tokyo. Meanwhile, Japanese companies reported a sharp increase in capital expenditure for the second quarter.

In the United Kingdom (UK), BRC comparable retail sales rose 0.8% year-on-year in August, up from a 0.3% increase in July, marking the fastest growth in five months. On Monday, the S&P Global UK manufacturing PMI held steady at 52.5 for August, consistent with preliminary estimates.

The British Pound received support as traders anticipate no rate cut from the Bank of England (BoE) at its September meeting, while the chance of a 25 basis point (bps) rate cut at the November meeting stands at 87.2%.

Traders are awaiting BoE Deputy Governor Sarah Breeden’s role as moderator of a panel on supervisory cooperation at a joint conference hosted by the European Central Bank and the European Banking Authority on Tuesday.

Inflation FAQs


Inflation measures the rise in prices of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change month-on-month and year-on-year. Core inflation excludes more volatile items such as food and fuel, which can fluctuate due to geopolitical and seasonal factors. Core inflation is the figure that economists focus on and is the target level for central banks, which are mandated to keep inflation at a manageable level, usually around 2%.


The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change month-on-month and year-on-year. The core CPI is the target for central banks as it excludes the volatility of food and fuel. When the core CPI exceeds 2%, interest rates typically rise, and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually translates into a stronger currency. The opposite is true when inflation falls.


Although it may seem counterintuitive, high inflation in a country drives up the value of its currency and vice versa in the case of lower inflation. This is because the central bank will typically raise interest rates to combat higher inflation, which attracts more global capital inflows from investors looking for a lucrative place to park their money.


Gold was once the go-to asset for investors during times of high inflation because it preserved its value, and while investors often still buy Gold for its safe haven properties during times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks raise interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity cost of holding Gold versus an interest-bearing asset or putting the money in a cash deposit account. Conversely, lower inflation tends to be positive for Gold as it lowers interest rates, making the shiny metal a more viable investment alternative.

Source: Fx Street

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