Pound Japanese Yen Exchange Rate Slides as Covid-19 Restrictions Tighten Further

Weaker Japanese Data Fails to Boost Pound Japanese Yen Exchange Rate

A sharp decline in Japanese capacity utilisation seen in November was not enough to shore up the Pound to Japanese Yen (GBP/JPY) exchange rate this morning.

Although utilisation plunged -2.9% on the month, demonstrating fresh evidence of the ongoing impact of Covid-19, this failed to weigh on the Japanese Yen (JPY).

Even with signs continuing to point towards a fresh loss of economic momentum in Japan the Yen held onto a stronger footing against its rivals, benefitting from a wider sense of safe-haven demand.

With Covid-19 restrictions tightening across Europe as well as in China worries over the global economic outlook picked up once again, giving JPY exchange rates a solid boost as risk appetite faded.

Rising UK Inflation May Encourage Pound Rally

As the UK looks set to remain in a state of lockdown for the foreseeable future the appeal of Pound Sterling (GBP) remained limited, meanwhile.

However, the GBP/JPY exchange rate could find some support on Wednesday if December’s UK inflation data proves encouraging.

Forecasts suggest that the headline inflation rate picked up from 0.3% to 0.5% on the year, a sign which could give the Bank of England (BoE) greater cause for optimism.

As long as inflation appears set to push higher in the months ahead the case for any fresh BoE policy action would weaken, giving the Pound a boost against its rivals.

Comments from BoE Chief Economist Andy Haldane could also provoke some GBP exchange rate volatility, especially if he makes any mention of negative interest rates.

Japanese Yen Looks for Fresh Boost on Widened Trade Surplus

With markets anticipating a widening of Japan’s trade surplus for December the mood towards the Yen may remain positive in the days ahead, though.

A forecast 2.4% increase in export volumes on the year would give investors some reason to bet on greater economic resilience, suggesting a more limited impact from the pandemic.

Evidence of Japanese trade conditions holding up even in the face of tightening global restrictions could give JPY exchange rates a fresh boost.

Unless market risk appetite shifts significantly towards optimism in the near term a sense of safe-haven demand should keep a floor under the Japanese Yen.

Persistent UK Service Sector Weakness to Weigh on GBP Exchange Rates

Worries over the health of the UK economy could pick up further ahead of the weekend with the release of January’s manufacturing and services PMIs.

After the weak reading seen in December forecasts point towards the services PMI slipping further into contraction territory, dipping from 49.4 to 45.

As long as the service sector continues to demonstrate weakness the chances of a negative UK gross domestic product are likely to rise, to the detriment of GBP exchange rates.

Without a surprise improvement in the performance of the service sector the GBP/JPY exchange rate looks set to remain biased to the downside this week.

Louisa Heath

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