Pound Japanese Yen (GBP/JPY) Exchange Rate Softens as BoJ Opens Door to Rate Hikes

Pound Japanese Yen (GBP/JPY) Exchange Rate Weakens as BoJ Indicates Hawkish Shift

The Pound Japanese Yen (GBP/JPY) exchange rate is weakening today, as the Bank of Japan (BoJ) took a subtly hawkish stance on inflation.

At the time of writing, GBP/JPY was trading at ¥165.5620, a fall of roughly 0.2% from the morning’s opening rates.

Japanese Yen (JPY) Strengthens as BoJ Indicates Shift Attention to Inflation Overshoot

The Japanese Yen (JPY) is rallying against most peers this morning, as the Bank of Japan (BoJ) acknowledged inflation overshoots.

Overnight, Asahi Noguchi, a BoJ board member, indicated that the bank could ‘pre-emptively’ withdraw stimulus if inflation remains high.

The BoJ currently goes against the grain with their loose tightening policy, Noguchi indicated a shift towards interest rate hikes.

Noguchi stated:

‘There’s a chance we’ll act pre-emptively. Trend inflation hasn’t reached 2% yet. But if there’s certainty that level will be met, it won’t be surprising for the BOJ to shift monetary policy.’

The shift prompted investors to cheer, shrugging off a further contraction in manufacturing. The PMI showed that the sector had contracted to 49 for the first time since January 2021, with inflationary pressures mounting.

Pound (GBP) Rallies as Risk-Sentiment Negates Bleak Economic Outlook

The Pound (GBP) is making strides against other peers this morning, as the market mood shifts towards risk-on trade. The shift comes as Federal Reserve Chair Jerome Powell seemed to put the brakes on continuing with aggressive rate hikes.

With markets now pricing in a 50bps rate hike from the Fed, investors took a turn to riskier assets. In turn, the increasingly risk-sensitive Sterling saw boons, despite the economic outlook for the UK continuing to darken.

The cost-of-living crisis is potentially capping Sterling’s gains today, as analysts continue to examine its impact on the private sector.

Rob Dobson, Director at S&P Global Marketing Intelligence, explored how manufacturing had been affected. He stated:

‘The outlook for the sector also darkened, as confidence among manufacturers fell to its lowest level since April 2020. Companies are also reporting rising recession fears, weak consumer spending and subdued client confidence.’

Furthermore, reports of how the crisis is impacting consumers may be playing on investors minds. Today, Ofwat reported that the number of households struggling to pay water bills has jumped by a third. Ofwat’s report further showed that 75% of people aged 18-34 often struggled to pay household bills.

Pound Japanese Yen (GBP/JPY) Exchange Rate Forecast: Domestic News to Dent Sterling?

Looking ahead for the Pound Japanese Yen exchange rate, neither side is due to see data in the short term.

As such, the core catalyst of movement may come from UK domestic news. With the recession and cost-of-living crisis continuing to impact the UK, any further downbeat news could weaken Sterling.

For JPY, should BoJ policymakers continue to err on the side of hawkish, the Yen could rise further.

John Mulcahey

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