Pound Sterling to Japanese Yen (GBP/JPY) Exchange Rate Rises as BOJ Signals Potential Policy Easing

Increasing BOJ Dovishness Boosts Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate

As the Bank of Japan (BOJ) signalled a willingness to inject further stimulus into the economy in the months ahead the Japanese Yen (JPY) fell out of favour with investors this morning.

The prospect of greater BOJ policy easing weighed heavily on JPY exchange rates, given that interest rates already sit in negative territory at -0.1%.

With the Federal Reserve appearing on course to cut interest rates in July the odds of fresh BOJ policy action have continued to increase.

As evidence of a persistent global economic slowdown grows the outlook for the faltering Japanese economy appears discouraging, helping to shore up the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate.

Underwhelming UK Retail Sales Limit Pound Sterling (GBP) Upside

Although May’s UK retail sales data proved disappointing this was not enough to knock Pound Sterling (GBP) back from its recent bullish run.

While retail sales excluding auto fuel saw a -0.5% contraction on the month, signalling a weaker level of consumer confidence, GBP exchange rates remained on a stronger footing.

With domestic wage growth continuing to accelerate, driven by a dip in inflationary pressure, markets remain hopeful of consumer spending picking up further in the coming months.

The ongoing sense of uncertainty over Brexit also failed to weigh down the GBP/JPY exchange rate this morning, even though the odds still point towards a high risk of a no-deal Brexit.

BoE Hawkishness Set to Boost GBP/JPY Exchange Rate

Further gains could be in store for the GBP/JPY exchange rate on the back of today’s Bank of England (BoE) policy announcement, in spite of no change in monetary policy being forecast.

If the BoE’s meeting minutes show a greater willingness amongst policymakers to raise interest rates before the end of the year this could give Pound Sterling a fresh boost.

While inflation fell back to 2% in May and Brexit-based uncertainty continues to cloud the economic outlook markets remain optimistic that a 2019 interest rate hike remains on the cards.

However, a shift towards greater caution within the Monetary Policy Committee (MPC) would expose the Pound to renewed selling pressure this afternoon.

Weaker Inflation to Add to Japanese Yen (JPY) Softness

Demand for the Japanese Yen could diminish further ahead of the weekend if the consumer price index is found to have eased in May.

Evidence that inflationary pressure within the Japanese economy is still failing to pick up would further increase the likelihood of the BOJ loosening monetary policy sooner rather than later.

Even so, the safe-haven Japanese Yen could find support if tensions between the US and Iran continue to escalate.

As long as worries over the health of the global economy remain investors are likely to favour the Yen over its more risk-sensitive rivals, boosting JPY exchange rates.

Louisa Heath

Contact Louisa Heath