- GBP/JPY rebounds from its lowest level of 180.10 since January, recorded on Monday.
- Cash earnings of workers in Japan rose 4.5 percent annually in June, the biggest increase since January 1997.
- The British Pound came under pressure as weak market sentiment dampened the attractiveness of risk-sensitive currencies.
GBP/JPY is trading around 184.50 during European hours on Tuesday, bouncing from its lowest level of 180.10 since January, recorded on Monday. However, the GBP/JPY pair faced challenges as the Japanese Yen (JPY) strengthened on rising expectations that the Bank of Japan (BoJ) may implement further monetary policy tightening.
Japan’s Chief Cabinet Secretary Yoshimasa Hayashi said Tuesday that “wage increases are expected to spread to part-time workers and small businesses by the fall, supported by strong Shunto results and minimum wage hikes.” Hayashi did not comment on currency exchange rates.
Cash earnings of workers in Japan posted a 4.5% year-on-year increase in average income in June, beating both the previous 2.0% and expectations of 2.3%. This is the largest increase since January 1997, reinforcing Japan’s transition to a rising interest rate environment.
The British Pound (GBP) performed weakly as dismal market sentiment has dampened the appeal of risk-sensitive assets. Rising tensions in the Middle East and fears of an economic slowdown in the United States (US) have enhanced the appeal of safe haven assets such as the Japanese Yen, undermining the GBP/JPY pair.
Additionally, the British Pound faced challenges as the Bank of England (BoE) delivered a widely expected 25 basis point interest rate cut at its August meeting last week.
BRC UK comparable retail sales rose 0.3% year-on-year in July, reversing a 0.5% decline in June and in line with market expectations. Traders are awaiting the S&P Global/CIPS Construction PMI for July, assessing business activity in the UK construction sector.
Central Banks FAQs
Central banks have a key mandate which is to ensure price stability in a country or region. Economies constantly face inflation or deflation when prices of certain goods and services fluctuate. A constant rise in the prices of the same goods means inflation, a constant fall in the prices of the same goods means deflation. It is the job of the central bank to keep demand in line by adjusting its interest rate. For larger central banks, such as the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has an important tool to raise or lower inflation: changing its benchmark interest rate. At pre-announced times, the central bank will issue a statement with its benchmark interest rate and give additional reasons for why it is holding or changing it (cutting or raising it). Local banks will adjust their savings and lending rates accordingly, which in turn will make it harder or easier for citizens to earn profits on their savings or for companies to borrow and invest in their businesses. When the central bank substantially raises interest rates, it is called monetary tightening. When it lowers its benchmark rate, it is called monetary easing.
A central bank is usually politically independent. Members of the central bank’s policy council go through a series of panels and hearings before being appointed to a position on the policy council. Each member of that council usually has a particular conviction about how the central bank should control inflation and the resulting monetary policy. Members who want very loose monetary policy, with low rates and cheap loans, to substantially boost the economy, while being content with inflation just above 2%, are called “doves.” Members who prefer higher rates to reward saving and want to keep inflation under control at all times are called “hawks,” and they will not rest until inflation is at or just below 2%.
Typically, there is a chairman who chairs each meeting, has to build consensus between hawks or doves, and has the final say when votes must be split to avoid a 50-50 tie on whether current policy should be tightened. The chairman will make speeches, which can often be followed live, in which he or she will communicate the current monetary stance and outlook. A central bank will try to push its monetary policy forward without causing wild swings in rates, stocks, or its currency. All central bank members will channel their stance to the markets before a monetary policy meeting. A few days before a monetary policy meeting is held and until the new policy has been communicated, members are prohibited from speaking publicly. This is called a silent period.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
