Chancellor Philip Hammond’s 2017 Budget failed to prevent the Pound to Japanese Yen (GBP JPY) exchange rate from slumping sharply, entirely reversing the week’s earlier gains.
While Hammond committed to extra spending in his Budget announcement, this was quickly offset by the discouraging nature of the Office for Budget Responsibility’s (OBR) latest economic forecasts.
As productivity, wages and the wider economy are all expected to see a much weaker growth trajectory over the forecast period than previously thought, this weighed heavily on the Pound.
Although the second estimate of third quarter UK gross domestic product confirmed a modest uptick from 0.3% to 0.4% in quarterly growth, this failed to offer GBP exchange rates a rallying point.
The underlying details of the report were less than encouraging, with business investment and construction output slowing.
All in all, the outlook of the UK economy still looks rather muted at this juncture.
Today’s Japanese Yen Outlook: Risk-Off Mood Supports JPY Exchange Rates
Demand for the Japanese Yen (JPY) has remained fairly solid this week thanks to greater market appetite for the safe-haven currency.
This was largely fuelled by concerns over the political situation in Germany, with the collapse of coalition talks putting long-standing Chancellor Angela Merkel’s future in doubt.
Rising odds of fresh elections have provoked fears over the stability of the currency union, encouraging investors to pile out of the Euro in favour of the lower-risk Yen.
While signs from the Japanese economy have remained largely sluggish, this was not enough to boost the Pound to Japanese Yen (GBP JPY) exchange rate, with the Yen still somewhat detached from domestic data.
Brexit Remains Significant Downside Risk to GBP JPY Exchange Rate
Theresa May’s minority government appears to have dodged a bullet with the mildly positive reaction to Hammond’s Budget amongst Conservative MPs.
However, this is unlikely to ease the sense of political jitters that have plagued GBP exchange rates for long.
In spite of the positive noises that members of the Cabinet have made, there’s still a significant degree of uncertainty over Brexit, something that limits the upside potential of the Pound.
Sterling could come under increased pressure in the near term if the EU does not look prepared to give the green light for Brexit negotiations to proceed to their second phase.
Unless the UK can break the current deadlock on the subject of its terms of departure from the bloc, the GBP JPY exchange rate could struggle to make particular headway in the coming week.
On the other hand, if negotiators do get approval to move on to trade talks imminently then the Pound may well return to a generally stronger footing.
Japanese Yen Forecast: Manufacturing PMI in Focus
Some volatility could be in store for Japanese Yen (JPY) exchange rates if Friday’s manufacturing PMI shows any particular change on the month.
However, anything short of a significant downside surprise is unlikely to especially benefit the GBP JPY exchange rate ahead of the weekend.
Yen exchange rates look set to remain well-supported unless market risk appetite starts to pick up more markedly in the near term.
A weaker US Dollar also benefits JPY exchange rates, even though markets continue to expect a December interest rate hike from the Federal Reserve.
Even so, as long as Japanese officials and Bank of Japan (BoJ) policymakers talk up the prospect of monetary policy remaining loose for longer the Yen may struggle to maintain any major momentum against its rivals.