Even in the wake of a sweeping election victory for incumbent Prime Minister Shinzo Abe, the mood towards Japanese Yen (JPY) exchange rates soured.
While this averted the sort of political upset that has dogged similar votes around the world over the last year, markets were not particularly thrilled by Abe’s government gaining such an apparently strong mandate.
With the Liberal Democratic Party holding onto a strong majority, the program of ‘Abenomics’ looks set to continue for the foreseeable future, further decreasing the odds of the Bank of Japan (BoJ) returning to a tightening bias.
As ultra-loose monetary policy is likely to persist until the BoJ reaches its 2% inflation target, which is still a distinctly distant prospect at this juncture, support for the Yen appears relatively limited.
Rising UK Growth Boosted GBP JPY Exchange Rate
Demand for Pound Sterling (GBP) exchange rates, on the other hand, leapt after the third quarter UK gross domestic product data bettered expectations on Wednesday.
This saw Sterling surge higher across the board, with investors encouraged to find that growth had unexpectedly accelerated from 0.3% to 0.4% on the quarter.
While this is still some way short of the long-term average, this modest uptick helped boost the GBP JPY exchange rate further.
The relative resilience of domestic growth is likely to give Bank of England (BoE) policymakers greater cause for confidence, prompting the odds of an imminent interest rate hike to rise.
With markets increasingly betting on the BoE opting to tighten monetary policy next week, there was little reason not to favour the Pound.
Steady Japanese Inflation to Limit Yen (JPY) Demand
Even so, the Yen could find a rallying point ahead of the weekend if September’s Japanese consumer price index proves positive.
Although forecasts point towards inflationary pressure remaining steady, at an underwhelming 0.7% on the year, the impact of any upside surprise is likely to be significant.
However, if inflation fails to show any fresh signs of acceleration then the mood towards the Yen is likely to remain generally muted.
With the BoJ looking set to maintain its dovish bias until CPI is markedly closer to the target range investors may struggle to find any particular cause for confidence in the near term.
Safe-haven demand could help to shore up the Yen, though, if there is any major deterioration in market risk appetite.
BoE Decision Remains Potential Source of GBP Exchange Rate Volatility
While October’s CBI retailing reported sales disappointed significantly to the downside on Thursday this failed to particularly dent the prospect of an imminent BoE rate hike.
At this stage the BoE would likely risk losing some of its credibility if it left rates on hold at its November policy meeting, given that a return to policy tightening has been so clearly telegraphed.
As a result the GBP JPY exchange rate is likely to remain supported over the coming days, barring any major developments relating to Brexit.
However, if the Monetary Policy Committee (MPC) shows a major split of opinion and the decision proves tight this could leave the Pound vulnerable to renewed pressure.
Should the Bank surprise markets by not delivering the expected rate hike Sterling could slump sharply across the board.