The Pound to Japanese Yen exchange rate quickly shed around 2 Yen in value on Thursday evening to hit its worst level since April. Sterling plunged when it became clear the UK general election had ended in a ‘hung parliament’.
However, the Japanese Yen struggled to capitalise due to this week’s underwhelming Japanese data. As a result, GBP/JPY continues to test levels above 140.00.
Pound (GBP) Sold as Investors React to UK Election Outcome
After months of markets generally expecting UK Prime Minister Theresa May’s Conservative party to easily increase its parliamentary majority in 2017’s general election, the election result came as a surprise to many.
On Thursday evening, an exit poll published by major British TV news stations indicated that the election was likely to end in a hung parliament. Sterling plunged on this news and weakened further when this became reality on Friday morning.
A hung parliament means that no party won enough seats to form a majority government. As the Conservatives previously had a majority, this means UK Prime Minister Theresa May made something of an error in judgement by calling the election in the first place.
While Sterling has recovered from its worst levels amid speculation that May will remain Prime Minister and head up a minority government, the Pound outlook is notably weaker now.
A minority government is unsurprisingly weaker than a majority and will have a difficult time passing laws and economic legislation through parliament.
This could also have a negative effect on Brexit negotiations, as the number of parliamentary opponents to the Conservatives’ Brexit angle has increased.
Japanese Yen (JPY) Struggles to Capitalise on Japan Growth Concerns
Despite the Japanese Yen being a popular ‘safe haven’ in times of market uncertainty, the Yen’s strong performance in recent weeks has seen it hit resistance.
The Japanese Yen’s rival, the US Dollar, has been more appealing to investors seeking ‘safe havens’ this week too.
A US Congress testimony from ex-FBI director James Comey was not as damaging to US President Donald Trump as markets feared, lightening some of the political uncertainty the US Dollar has seen recently.
The Japanese Yen typically weakens when the US Dollar strengthens. Due to a weaker Japanese Yen, GBP/JPY has been able to hold above multi-month lows despite Pound uncertainty.
This week’s Japanese Gross Domestic Product (GDP) news has also been disappointing and weighed on Yen demand.
Japan’s quarterly growth rate was expected to come in at 0.6% but printed at 0.3%. The year-on-year growth rate slipped from 1.2% to 1% despite being projected to rise to 2.4%.
GBP/JPY Forecast: Hung Parliament Developments in Focus
The Pound outlook has been worsened by the election result, but Sterling could recover some of its losses if a government is formed quickly.
UK Prime Minister Theresa May has indicated she wishes to form a minority government with the informal backing of the Democratic Unionist Party (DUP). If she succeeds, Pound jitters may cool over the next week.
However, political uncertainty would remain high, as would Brexit uncertainty. Some analysts have suggested a minority government run by the Tories would not last in the long term. Others have questioned whether May will be able to remain the leader of the Conservatives after her election gaffe.
If May does indeed step down as Conservative leader, the Pound is likely to see further losses.
The Japanese Yen will remain a favourable ‘safe haven’ currency to investors looking to avoid political jitters, particularly if the US Dollar weakens again.
As a result, regardless of the Japanese Yen’s mixed movement in recent days the Pound to Yen exchange rate is likely to fall in the coming week.
It’s worth noting however that the Bank of Japan (BoJ) will be holding its June monetary policy decision next Friday, which could have a direct impact on the Yen if the bank sees a shift in tone.