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Yen Strengthens Against GBP and Other Majors Amid BOJ Hawkish Stance: Market Analysis and Projections

February 7, 2025
Smart Money

Yen Strengthens Amid BOJ Rate Hike Expectations

In a notable shift in the foreign exchange landscape, the Japanese yen emerged as the strongest currency major on Thursday, driven by hawkish sentiments surrounding the Bank of Japan (BOJ). This comes after BOJ policymaker Takatoshi Tamura publicly urged the central bank to consider raising interest rates to at least 1%, as current rates linger at a low 0.5%.

Market Reactions and Currency Movements

The speculation surrounding a potential rate hike has led to adjustments in market pricing. Many are foreseeing not just an increase in rates, but a significant move that could involve two cuts within this year. With inflationary pressures mounting as companies prepare to increase wages, market participants are anticipating that the first rate hike could occur as early as April.

Despite its strengthening position, the yen broadly faced losses on Thursday, with the USD/JPY pair dipping below the 152 mark. This decline puts the yen on track for its worst week in ten, and should the U.S. non-farm payroll (NFP) report show disappointing performance, the pair could test the significant support level of 150 before the weekend.

The Pound Sterling Faces Pressure

In contrast to the yen, the British pound (GBP) experienced considerable weakness following a dovish 25 basis point cut from the Bank of England (BOE). This decision saw interest rates drop from 4.75% to 4.5%, receiving unanimous support with a 9-0 vote among the bank’s monetary policy committee members. However, some members, notably Catherine Mann, advocated for a more aggressive 50 basis point reduction, signaling a divide within the committee.

BOE Governor Andrew Bailey indicated that further easing is likely, and that decisions will be made ‘meeting by meeting,’ reinforcing the notion that the bank may act sooner rather than later amidst growing economic pressures.

The Diverging Paths of BOJ and BOE

The contrasting monetary policy stances between the Bank of Japan and the Bank of England have significantly impacted the GBP/JPY currency pair, which experienced a sharp decline on Thursday, falling below the 189 threshold and reaching its lowest point since December.

Technical Analysis of GBP/JPY

The GBP/JPY has been in a five-week downtrend following a high in July, now experiencing a three-wave retracement towards the 200 level. Currently trading at the week’s low, and just above the December low, a break below this support level seems increasingly likely.

Key targets for further decline are the September low around 184 and the August low around 180. Should the yen continue to strengthen throughout the year, the target could drop to around 172—reflecting a significant 100% projection from previous highs. In a bearish five-wave move context, a further slide down to 160 could correspond with the 138.2% projection.

Broader Implications for Yen Strength

Technical indicators suggest that the bearish momentum for GBP/JPY aligns with similar trends across most yen pairs. The yen is gaining ground as a safe haven, with traders seeking refuge in it amidst ongoing global economic uncertainties. The CHF/JPY’s downward movement signals that the yen is firmly established as a preferred choice for safety, especially in light of the Swiss National Bank’s recent comments regarding negative interest rates.

As the yen continues to find strength, pairs such as AUD/JPY and EUR/JPY are also showing signs of potential declines, with AUD/JPY forming a head and shoulders pattern that could push it to as low as 76.

Upcoming Economic Events to Watch

As the market gears up for further events that could influence currency movements, several key economic reports are on the horizon, including:

  • 10:30 – Japan Household Spending
  • 10:50 – Japan Foreign Reserves (USD)
  • 16:00 – Japan Coincident and Leading Indicators
  • 18:00 – Germany Industrial Production
  • 00:30 – U.S. Nonfarm Payrolls Report
  • 02:00 – U.S. Consumer Sentiment (Michigan University)

As these reports unfold, market participants will be keenly observing the implications they hold for the yen and other major currencies, and how these dynamics play out in a globally interconnected economy.

For more insights on the evolving market landscape, follow our economic updates and expert analyses.

— Written by Matt Simpson

Follow Matt on Twitter @cLeverEdge