GBP/JPY holds losses around 195.00 due to risk-off sentiment
- GBP/JPY loses ground as risk aversion increases following Israel’s attack on Iran.
- The Pound Sterling struggles as the UK economy contracted more than expected in April.
- Traders expect the BoJ to keep its benchmark rate steady at 0.5% at next week’s policy meeting.
GBP/JPY extends its losses for the second successive session, trading around 195.00 during the European hours on Friday. The currency cross depreciates as the Pound Sterling (GBP) faces challenges amid risk aversion, driven by the escalating geopolitical tensions in the Middle East.
Israel expects a missile and drone attack from Iran following Israel's preemptive attack on dozens of Iranian sites to dismantle its nuclear program, noted by Israeli Minister of Defense, Israel Katz. Kats also declared a special state of emergency in the country, per Axios. White House Secretary of State Marco Rubio noted that “Tonight, Israel took unilateral action against Iran and their top priority is protecting American forces in the region.” In response, Iran withdrew from the sixth round of talks between the United States (US) and Iran scheduled this weekend.
Additionally, the GBP/JPY cross loses ground as the British Pound faces selling pressure as the United Kingdom (UK) Office for National Statistics (ONS) reported that the economy shrank at a faster-than-expected pace in April. The UK Gross Domestic Product (GDP) declined by 0.3% month-over-month in April, faster than expectations of 0.1%. In March, the GDP growth rate was 0.2%.
The downside of the GBP/JPY cross could be restrained as the Japanese Yen (JPY) receives downward pressure as the Bank of Japan (BoJ) is expected to keep the benchmark rate steady at 0.5% at its upcoming meeting on June 17. BoJ policymakers expect slightly stronger inflation than previously anticipated, which could pave the way for future interest rate hike discussions, per Bloomberg.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.