The GBP/JPY price is in a recovery mode as investors focus on the actions by the Bank of England (BOE) and Bank of Japan (BOJ). The pound to JPY pair is trading at 164.92, which is the highest it has been since July 1st of this year. It has risen by more than 2% from its lowest point this month.
BOE and BOJ divergence
The GBP to JPY price has been rising as investors predict the upcoming actions by the BOJ and BOE. The two have had a divergent path this year, with the BOE hiking rates in the past five straight meetings. With the UK economy in stagflation, analysts believe that the BOE will pause on rate hikes as officials monitor the impact of its hikes.
BOE’s Andrew Bailey will publish the latest Financial Stability report on Tuesday and then have a press conference. In it, he will likely provide more clues about how the bank plans to handle the soaring inflation and the fact that the country is in stagflation. The UK is expected to have the slowest recovery among its peer countries.
Meanwhile, the GBP/JPY pair is reacting to hopes that the BOJ will adjust its policies in the coming months as inflation rises. Unlike other leading central banks like the Fed and BOE, the BOJ has maintained a dovish tone by continuing with its low-interest rates and quantitative easing policies. The bank has also been forced to intervene to safeguard its bond yield target.
Analysts believe that the BOJ will change its tone soon since inflation is expected to remain above 2% for longer. In a statement, a former BOJ official said that the bank will boost its inflation outlook for this year and possibly start hiking rates.
The four-hour chart shows that the GBP to JPY price has been in an upward trend in the past few days. As a result, it has retested the lower side of the Andrews Pitchfork tool that is shown in pink. It has also moved back to the 25-day and 50-day moving averages while the Relative Strength Index (RSI) has moved above 50.
I suspect that the GBP/JPY pair will resume the downward trend later this month as investors price in a more hawkish BOJ and a more subdued Bank of England. If this happens, the next key support point to watch will be at 163. A move above the resistance at 165.75 will invalidate the bearish view.