British Pound holds steady against Yen as intervention risks loom; scope for losses seems limited

• GBP/JPY trades within a range on Friday, with no clear intraday direction.
• The JPY draws support from intervention concerns and BoJ rate rise expectations, limiting spot gains.
• The substantial Japan-UK interest rate gap provides support and cushions the downside.

At around the mid-211.00s in early European trading on Friday, GBP/JPY sits just above the one-and-a-half-week low reached the previous day, alternating between modest gains and small losses. The cross nevertheless remains within the range established over the past week. Traders are staying alert to speculation that the authorities will intervene again to support the Japanese Yen (JPY).

Thursday brought a warning from Japan’s top currency diplomat, Atsushi Mimura, that recent exchange rate moves had been too rapid. He also reminded markets that it was too soon to forget the summer intervention. Japan’s Finance Minister Satsuki Katayama, meanwhile, indicated that the authorities were watching rapid, one-sided FX moves. She added that the government would respond appropriately to currency volatility and engage with the US Treasury. Expectations of an imminent Bank of Japan (BoJ) rate rise are also strengthening, lending support to the JPY and restraining GBP/JPY.

Uncertainty over when the BoJ will raise rates and how quickly it will proceed, however, persists among investors. Together with Japan’s substantial interest rate gap with other major economies, including the UK, this sustains the so-called carry trade and discourages traders from taking bullish JPY positions. With the BoJ policy rate at 1.25% and the Bank of England (BoE) having lifted its base rate to 4.00%, the difference stands at 275 basis points. A further BoE rate rise in December is also being priced in by traders, maintaining Sterling’s yield advantage and underpinning GBP/JPY.