BOE Rate Cut as Expected – Pound Faces Downward Pressure

Summary:

The Bank of England (BoE) is set to cut interest rates by 25 basis points on Thursday, extending the downward trend of GBPJPY. Robust wage and service sector data in Japan have intensified hawkish sentiment surrounding potential rate hikes by the Bank of Japan (BoJ).

SELL GBPJPY

Close Time

CLOSED

189.300

Entry Price

184.500

193.200

211.343 -0.004 0.00%

146.8

Pips

Profit

184.500

187.832

Exit Price

189.300

Entry Price

193.200

Fundamentals

GBPJPY has fallen for the second consecutive day, breaking below 189.00 during the European session on Thursday. The asset has struggled as the Bank of England voted 7-2 to cut interest rates by 25 basis points (compared to 6-3 in the previous meeting).

While economic activity in the UK has slowed, inflationary pressures persist. Rising energy prices, strong wage growth, and businesses' intentions to raise prices in response to the October tax increase have led to higher inflation expectations. The growth outlook may not be as bleak as suggested by business surveys, with the substantial increase in public service spending announced in the Autumn Budget potentially providing a boost to growth this year.

In this context, the BoE must remain committed to bringing inflation back to its target level. While the rate cut may be welcomed in the short term, failing to curb inflation now could come at a higher cost in the future.

Conversely, JPY has strengthened against other currencies, with robust wage and service data fueling expectations that the BoJ will take a more hawkish stance. Data show that Japan's real wages rose for the second consecutive month in December, while nominal wage growth reached its highest level in nearly three decades.

Japan's Finance Minister, Kato Katsunobu, told the Diet on Thursday that deflation has not ended, noting that inflationary conditions persist with continued price increases.

The yen has performed strongly, with the 10-year Japanese government bond yield rising to nearly 1.30%, its highest level since April 2011. However, with the BoJ's policy rate expected to peak at around 1.00% within the next two years, the upside for the yen and Japanese bond yields remains limited.

BOE Rate Cut as Expected – Pound Faces Downward Pressure_1

Technical Analysis

GBPJPY is currently maintaining a downward trend during the day. On the downside, a break below 189.31 would indicate that the correction from 180.00 has not been completed, with the decline targeting the 186.40 level. Further falls could challenge the key support at 184.50.

From a broader perspective, the price action from 208.09 is seen as a correction to the entire rally that began from 123.94 (the 2020 low). The consolidation range should be set between the 38.2% Fibonacci retracement level of 123.94 to 208.09, which is between 175.94 and 208.09. However, a decisive break below 175.94 would signal that a deeper correction is underway.

Trading Recommendations

Trading Direction: Sell

Entry Price: 189.30

Target Price: 184.50

Stop Loss: 193.20

Valid Until: February 21, 2025, 23:55:00

Support: 188.06/186.75/185.18

Resistance: 189.31/190.35/192.68

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