GBP JPY Exchange Rate Struggles to Recover as Yen Boosted by Fed Uncertainty

The Pound to Japanese Yen exchange rate dropped to its worst levels since June this week and has been unable to recover despite some solid UK data and Bank of England (BoE) speculation. Uncertainty about the Federal Reserve policy outlook has left the Yen sturdy this week.

After briefly touching a two-month-high of 147.68 at the beginning of the week, GBP/JPY fell to 146.00.

Pound Sterling Fluctuates Amid Bank of England Uncertainty

Despite this week’s solid UK job market stats, the Pound’s strength has been limited.

While wage growth is rising faster than expected it is still rising far slower than the rate of inflation, which has caused real pay to drop and pay squeeze concerns to worsen.

Market speculation on the Bank of England’s (BoE) policy outlook has also been mixed. With other UK ecostats under performing, concerns are rising that Britain’s economy could slow for the rest of the year. As a result, traders don’t expect many BoE officials to take hawkish stances any time soon.

On the other hand though, in reaction to tightening monetary policy elsewhere in the world, BoE hawk Ian McCafferty has argued that the bank should at least discuss whether or not to lighten its aggressive quantitative easing (QE) program.

This and the week’s job data has improved Pound performance in the second half of the week, but Sterling has been unable to recover against its sturdier rivals.

Japanese Yen Sturdy on Mixed Fed Rate Hike Bets

A relatively strong Japanese Yen has been able to limit the Pound’s recovery attempts this week.

The Japanese Yen is commonly negatively-correlated to the strength of its biggest rival, the US Dollar. As a result, the Yen has benefitted from this week’s drop in Federal Reserve interest rate hike bets.

Federal Reserve Chairwoman Janet Yellen has indicated that while markets should expect gradual interest rate hikes, inflation remains a concern.

As a result, investors are unsure of when the Fed will hike US interest rates again or begin to unwind its massive balance sheet.

This has led investors seeking ‘safe havens’ to favour the Yen this week over the US Dollar, keeping GBP/JPY below the week’s opening levels.

However, GBP/JPY has recovered slightly from its worst levels too. Speculation that the Bank of Japan (BOJ) may be lowering its 2017 inflation forecast weakened Yen demand towards the end of the week.

GBP JPY Forecast: Investors Await UK Inflation Stats

The next big focus for Pound to Yen investors will be Britain’s June inflation report, which will be published next Tuesday.

If inflation is even higher than expected, investors will speculate that the Bank of England (BoE) may become pressured into tightening UK monetary policy.

On the other hand, lower inflation than expected may not necessarily weaken the Pound either as investors will hope that Britain’s pay squeeze could calm.

Next week will also be key for Japanese Yen trade, as the Bank of Japan (BoJ) will hold its July monetary policy decision.

Investors don’t expect any shift in tone from the BoJ, but if the bank does indeed cut its inflation outlook the Yen is likely to weaken.

Luke Trevail

Luke studied Journalism at university but quickly moved into the financial sector, initially working in retail banking before joining TorFX in 2007. As a Senior Account Manager Luke assists in overseeing the management of the company’s exposure to currency volatility. He uses his years of foreign exchange experience to produce regular news updates exploring the latest currency movements.

Contact Luke Trevail