The GBP JPY exchange rate lost significant ground at the start of the week, thanks to rumours circulating over the future of Bank of England (BoE) Governor Mark Carney. Worries that the Governor could depart in 2018 weighed heavily on the Pound, with markets viewing Carney as a post-referendum economic stabilising force. While there was some relief when it was announced that Carney would be extending his term until June 2019 this ultimately proved short-lived.
Demand for the Japanese Yen was a little muted in response to the Bank of Japan’s (BoJ) latest policy meeting on Tuesday morning. Unsurprisingly the central bank did not make any changes to its monetary policy, although this failed to particularly shore up confidence in the Yen. With the BoJ lowering its inflation forecasts, suggesting that an end to the central bank’s easing bias is not in sight, GBP JPY exchange rate was boosted. Further support came from a general decrease in safe-haven demand, thanks to some bullish Chinese data.
Rising Producer Prices Weighed on GBP JPY Exchange Rate
As the UK Manufacturing PMI for October fell short of forecast confidence in Sterling weakened further, despite the sector remaining in a state of solid growth. In large part this was due to the fact that producer prices were shown to have risen significantly on the month. With producers expected to pass on at least some of this increase this indicated that inflationary pressure is likely to spike in the coming months, with consumers set to be increasingly squeezed.
Investors piled back into the Yen, however, after an ABC News/Washington Post poll put Donald Trump one point ahead of Hilary Clinton. As this suggested that the outcome of the US presidential election is not quite as clear as some had previously thought demand for the US Dollar plunged. With markets seeking to protect against the possibility of a Trump victory and the inevitable economic volatility that would follow safe-haven assets such as gold and the Yen saw much increased demand.
US Election Jitters Forecast to Buoy Japanese Yen Demand
If worries over the US election persist over coming days then the GBP JPY exchange rate is expected to remain on the back foot. With risk aversion heightened and the US Dollar unattractive to investors the Yen is likely to continue strengthening as market jitters worsen. A victory for the Republican candidate is thought to rule out any action from the Federal Reserve before the end of the year. So long as the Fed looks less likely to return to its monetary tightening cycle in the near future the Japanese Yen is expected to maintain a more bullish outlook.
In the meantime, the appeal of the Pound could be severely dented by the minutes of the BoE’s November policy meeting. While there is little expectation for policymakers to cut interest rates to a fresh low at this juncture the tone of the minutes looks set to move market sentiment. If the door is left open for policy easing in December then the GBP JPY exchange rate could slump sharply, raising concerns that the BoE is not keeping its powder dry in case of a more substantial economic downturn.