GBP / JPY Could Fall As Fed Feeds Yen Real Yield Advantage – Best Third Quarter Trading Opportunities


  • Japanese Yen Holds As Fed Increases Rate Hike Schedule
  • Structural Disinflation Bets Give Japan a Real Yield Edge
  • pound could suffer excessive losses against the JPY, with an eye on the top

Japanese yen rose in the wake of the important FOMC meeting in June, where authorities said price growth exceeded their expectations and moved the schedule for upcoming interest rate hikes. Having previously seen flat rates through 2023, the central bank has now forecast two increases that year.

price market view implicit in federal funds futures after the announcement is even more aggressive, forecasting one increase in 2022 and two more the following year. This likely echoes subsequent aggressive comments from officials, including the chairmen of the Fed’s branches in St. Louis, Boston and Dallas.

In response, Japanese yields rose in line with US yields, reflecting the ubiquity of the US dollar as a medium of exchange for world trade. Almost 80% of global currency transactions are settled in USD. refore, an increase in the cost of dollar loans generally translates into higher credit costs globally.

As it happens, the process that the Fed is slowly initiating sees most global policy rates converge in Japan, that is, towards zero and sometimes further into negative territory, during the onset of the pandemic. Covid-19. Recovery from these depths in most places should go hand in hand with reflation.

Japan is a familiar exception. Here, the structural forces that keep prices low for the better part of 30 years and inspire an epic (and mostly unsuccessful) counteroffensive by the BOJ are still in play. This means that real interest rates, that is, nominal returns discounted from the expected inflation rate, are higher in Japan than in most of the G10.

As most nominal rates have converged close to zero, the size of the inflation cut has become critical. This is inherently small in Japan compared to its global counterparts, so the inflation-adjusted return to be achieved on JPY-denominated holdings turned out to be more attractive.

BOJ’s policy of limiting 10-year yields to 0% is an obvious hurdle here, but it seems fragile. central bank already owns nearly half of Japan’s bond issues to back it up. possibilities to do more seem limited, for fear that the monetary authority and the government itself will be accused of total monetization of the debt, an international taboo.

Among the major currencies, the yen’s most pronounced advantage in this regard appears to be against the British pound. As inflation concerns push the Fed to push nominal rates higher globally, Japan’s real yield advantage looks set to expand further.


On the technical front, GBP / JPY could form a double top at resistance near the January 2018 high. Prices broke the seven-month trend line support and negative RSI divergence warns of a decline in the bullish momentum. Exceeding the support at 151.32 could expose the 148-149 area. A further break below that could also pierce the March 2020 uptrend.

GBP / JPY weekly cheart created with TradingView

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Also read Fed Speeches, Updated Interest Rate Expectations; Jackson Hole Preview

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