Contraction in Japanese GDP Failed to Dent Yen
Somewhat surprisingly the Japanese Yen reacted positively to the news that the fourth quarter Japanese GDP had contracted more sharply than expected. Falling from 1.3% to -1.4% on the year, this disappointing result seemed to indicate that the country’s current economic program has failed to counteract building downside pressures.
However, Prime Minister Shinzo Abe pledged that the Bank of Japan (BoJ) has the capacity to introduce more accommodative policy measures, intimating that interest rates could be pushed further into negative territory. The prospect of more monetary intervention saw the Yen benefit strongly, with the currency being pushed up across the board.
Global stock markets rallied on the back of these hopes, with the Nikkei closing up an impressive 7% on Monday, as investors were inclined to return to a less risk averse mentality. The latest Chinese trade data equally encouraged speculation that the People’s Bank of China (PBoC) will resort to further stimulus, which helped the GBP/JPY exchange rate regain some ground.
Despite concerns that the UK’s housing market is overheating the Pound strengthened in response to the latest Rightmove House Price report. Prices rose 7.2% on the year in February, but as this signalled some measure of strength within the ailing UK economy traders were more inclined to take heart from the higher figure.
Yen Climbed on Safe-Haven Demand, UK Data Disappointed
Tuesday’s UK Consumer Price Index data, on the other hand, proved rather more mixed. Baseline inflation showed a modest uptick on the year of 0.3%, while the core CPI slid further than anticipated from 1.4% to 1.2%. As inflationary pressure evidently remains some way short of the Bank of England’s (BoE) 2% target range Sterling slumped markedly, pushing the GBP/JPY exchange rate sharply down.
The latest raft of UK employment data equally failed to encourage investors to favour the Pound, with the Unemployment Rate unexpectedly holding steady and wage growth remaining persistently slow. Altogether, in spite of a better-than-expected decrease in jobless claims, this seemed only to increase the likelihood of the BoE leaving interest rates unchanged for longer.
Economists have been prompted into dialling back their expectations for the date of the BoE’s move on monetary tightening, with some suggesting that interest rates could remain at their current lows until 2020. Consequently the GBP/JPY currency pair continued to shed value, in spite of Japanese data remaining unimpressive.
Worries over the state of the global economy crept back onto trader’s minds during the week, as Saudi Arabia and Russia failed to produce a solid agreement to reduce oil production and commodity prices continued to slide. As a result safe-haven demand built further, driving investors back into the lower-risk Yen.
‘Brexit’ Worries Push GBP/JPY to Two-Year Low
Demand for the Pound declined ahead of the weekend, in spite of particularly bullish UK Retail Sales figures, as markets concentrated on the summit of European leaders. Prime Minister David Cameron hopes to secure agreement on proposals to reform the UK’s relationship with the EU at this juncture, thus triggering a June referendum. However, with Poland, the Czech Republic and others opposed to certain measures the odds of an agreement look increasingly fragile. As a result the GBP/JPY exchange rate fell to a two-year low of 160.5550.
Should Cameron achieve a consensus, though, ‘Brexit’ concerns are expected to continue weighing on the Pound over the coming months. The Yen, meanwhile, could gain additional strength if markets struggle to maintain a more bullish outlook.