GBP/JPY marched higher in early Asian hours on Monday as the Japanese Yen demand faded on the back of growing optimism on the liquidity front. The risk sentiment got a boost on Monday due to a globalized effort to tame last week's liquidity crisis.
To reestablish confidence in the financial system, some major central banks, including the Bank of Japan (BoJ) and Bank of England (BoE), have made a coordinated effort to dilute the banking ecosystem across the globe with US Dollars. The swap line has been introduced for this purpose.
The main resource for this swap line is the Federal Reserve (Fed), which the Fed will lend US Dollars to other central banks in exchange for local currency as a short-term loan. The swap line will begin from Monday until April.
On Sunday, the Bank of England said it welcomed the actions by the Swiss authorities to merge Credit Suisse with UBS Group and also emphasized that the UK banking system is well-capitalized and funded. The BoE rate decision is on Thursday, and it will be important to see their forward guidance. This may be the last rate hike from the BoE amid the ongoing liquidity crisis.
The Bank of Japan's March meeting Summary of Opinions released earlier highlights nothing new, as the bank has remained on an ultra-easing monetary stance for decades. Adding to this, Japanese Finance Minister Shunichi Suzuki said on Monday he was closely watching market moves after a weekend rescue deal for Credit Suisse Group
It is also important to watch how this week unfolds on the liquidity front, citing some earlier reports stating that two European banks are under scrutiny. Therefore, the upside gains in GBP/JPY are likely to remain vulnerable.
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