Pound to Japanese Yen (GBP/JPY) Exchange Rate Slides Lower After UK Inflation Disappoints Forecasts

As the headline UK consumer price index fell short of forecast in March the Pound to Japanese Yen (GBP/JPY) exchange rate came under fresh pressure.

Markets were distinctly disappointed to discover that the inflation rate had dipped from 2.7% to 2.5% on the year, defying expectations of a steady figure.

This naturally provoked speculation over the likelihood of the Bank of England (BoE) still raising interest rates at its May policy meeting, something which investors had been heavily pricing into the Pound (GBP).

GBP exchange rates plunged sharply in the wake of the data, even though this easing in price pressures does offer some support to UK household finances.

Weaker Japanese Exports Fail to Boost Pound Japanese Yen Exchange Rate

Although March’s Japanese export index missed forecast, clocking in at 2.1% rather than 4.7%, this failed to offer the Pound to Japanese Yen (GBP/JPY) exchange rate any particular support.

Even so, the mood towards the Japanese Yen (JPY) still largely diminished on Wednesday, with investors nervous over the potential for Japan to fall foul of increasing US protectionism.

As Japan runs a sizeable trade surplus with the US there is a risk that the focus of the Trump administration could turn its way, even as tensions with China seem to ease.

Doubts also remain over the outlook of the Japanese economy, which has proved rather sluggish in recent months and is still largely reliant on exports to drive growth.

Any fresh escalation in trade tensions could thus weigh heavily on JPY exchange rates.

GBP/JPY Exchange Rate Gains Possible on Rising UK Retail Sales

A rallying point could be in store for the Pound to Japanese Yen (GBP/JPY) exchange rate on Thursday, however, if UK retail sales data impresses.

Any increase in consumer spending would bode well for the outlook of the UK economy, potentially offering a boost to the first quarter UK gross domestic product.

Forecasts for the data are mixed, though, with sales excluding auto fuel thought to have contracted -0.4% on the month.

If consumers show greater signs of caution this could put additional downside pressure on GBP exchange rates, giving the BoE greater incentive to reconsider the idea of a May interest rate hike.

Weaker Japanese Inflation Forecast to Boost Pound Japanese Yen (GBP/JPY) Exchange Rate

Further volatility is likely in response to Friday’s Japanese inflation data, which may help to limit any Pound to Japanese Yen (GBP/JPY) exchange rate weakness ahead of the weekend.

Investors expect to see the headline inflation rate dip from 1.5% to 1.1% in March, highlighting Japan’s continued struggle to stimulate greater price pressures.

Any easing in inflationary pressure would encourage the Bank of Japan (BoJ) to maintain its distinctly dovish policy stance for the foreseeable future, something which would weigh heavily on JPY exchange rates.

However, if there are signs that underlying price pressures within the Japanese economy are still building this could prompt the Pound to Japanese Yen (GBP/JPY) exchange rate to shed further ground.

Adam Solomon

Adam joined the team at TorFX soon after graduating from University in 2005 with a degree in Journalism. Since then Adam has advanced to become both Head of Trading and Head of Treasury. His keen interest in the currency market and knowledge of what drives exchange rates makes him perfectly positioned to produce regular market updates focused on the movements of the major currencies.

Contact Adam Solomon