Pound Japanese Yen Exchange Rate Slumps as UK Services PMI Delivers Major Tumble

Plunge in UK Services PMI Fuels Pound Japanese Yen Exchange Rate Slump

As the UK services PMI fell significantly short of forecast in January the Pound to Japanese Yen (GBP/JPY) exchange rate was left on the back foot.

Investors were caught off guard as the PMI plunged even deeper into contraction territory than anticipated, dropping from 49.4 to 38.8.

This major weakening of service sector activity highlighted the impact of the latest national lockdown, adding to fears that the UK economy remained under pressure at the start of 2021.

With the UK appearing increasingly on course to suffer a sustained recession the mood towards Pound Sterling (GBP) naturally soured, especially as uncertainty over the duration of the current lockdown remains.

Japanese Economic Slowdown Fails to Dent JPY Exchange Rates

While the Japanese economy also showed signs of slowdown in January this was not enough to put any particular pressure on the Japanese Yen (JPY).

Even though both the manufacturing and service sectors experienced contraction this month JPY exchange rates pushed higher, buoyed by a renewed sense of market risk aversion.

With safe-haven demand on the rise once again the Japanese Yen found fresh traction against its rivals, even as confidence in the outlook of the domestic economy continued to fade.

As the week’s earlier sense of optimism started to temper the Japanese Yen was able to trend higher against many of the majors, reversing some of its previous losses.

Japanese Yen Set to Shrug off Bank of Japan Minutes

The release of the Bank of Japan’s (BoJ) monetary policy meeting minutes on Monday is unlikely to provoke any major JPY exchange rate volatility.

With markets not expecting to see any signals that the central bank will enact fresh monetary loosening in the near future the mood towards the Yen may remain bullish.

On the other hand, if the general sense of market sentiment turns risk-positive once again this could see JPY exchange rates struggle to hold onto their footing next week.

As long as markets see cause for optimism in the prospect of the global economy recovering from the pandemic sooner rather than later the appeal of the Japanese Yen looks set to weaken.

Rising UK Unemployment Set to Drag on Pound Demand

Confidence in the outlook of the UK economy could weaken further on Tuesday, meanwhile, with the release of the latest labour market data.

Forecasts point towards the headline unemployment rate picking up from 4.9% to 5.1% in November, reflecting the impact of the second national lockdown.

Evidence that job losses mounted over the course of the fourth quarter would leave investors with limited cause for optimism, with a weak labour market likely to drag on the wider economy.

Unless signs point towards some level of resilience within the UK labour market the Pound to Japanese Yen exchange rate looks set to extend its downtrend.

Louisa Heath

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