Pound Japanese Yen (GBP/JPY) Exchange Rate Rallies as UK Labour Market Remains Tight

Pound Japanese Yen (GBP/JPY) Exchange Rate Strengthens as UK Employment Data Puts Pressure on BoE

The Pound Japanese Yen (GBP/JPY) exchange rate is strengthening this morning, as unemployment data points to a tight labour market in the UK.

At the time of writing, GBP/JPY is trading around ¥161.2920, a rise of roughly 0.3% from the morning’s opening rates.

Pound (GBP) Strengthens on Increased Rate Hike Bets

The Pound (GBP) is gaining ground this morning, following the release of a litany of employment data. The unemployment rate remained at 3.7% in December, pointing to a tight labour market. Meanwhile, wage growth increased far above forecasts, printing at 6.7%.

A tight labour market is likely to be viewed by the Bank of England (BoE) as a sign that domestic inflationary pressures remain. As such, investors appear to be supporting Sterling as rate hike bets increase.

Ashley Webb, an Economist with Capital Economics, explored the data further. He stated:

‘And with activity ending last year a bit stronger than the Bank had expected, we think the Bank of England may have one or two more rate hikes in the pipeline.’

Furthermore, real pay was seen to have declined at the fastest rate since 2009. Adjusted for CPI, wages fell by 4.3% over the last three months of 2022. This is likely to apply further pressure on the BoE, as inflation continues to harm UK workers and households.

Japanese Yen (JPY) Mixed Despite New BoJ Governor Appointment

The Japanese Yen (JPY) is largely directionless this morning, following the appointment of Kazuo Ueda as Governor of the Bank of Japan.

Ueda, a former member of the BoJ’s policy board, was appointed by the Japanese Government. Previously, Ueda has been a critic of the BoJ’s current ultra-loose policy, and may be keen to rollback the current yield curve control.

Naomi Muguruma, Senior Market Economist at Mitsubishi UFJ Morgan Stanley Securities stated:

‘Ueda is likely to focus on theory and empirical analysis in guiding monetary policy. I don’t think he will idly continue a policy that didn’t work and showing increasing side-effects’

As such, analysts are hopeful that the new governor could mark a sea change in the BoJ’s monetary policy.

However, last night’s GDP data release could be weighing on the Yen. The data came in below forecasts, printing at 0.2% as opposed to the 0.5% forecast.

While this still reflects a recovery in the Japanese economy, JPY investors were disappointed. The data appears to reiterate the Bank of Japan’s (BoJ) view that the recovery is fragile, and requires gentle policy. As such, rate hike bets amongst JPY investors could be diminishing, keeping the Yen downbeat.

Pound Japanese Yen (GBP/JPY) Exchange Rate Forecast: UK CPI to Boost Rate Hike Bets?

Looking ahead for the Pound, inflation data for January is due to print tomorrow. With CPI in the UK forecast to cool to 10.3%, Sterling could see support.

As CPI could remain in double digits, and over five times the Bank of England’s target rate, rate hike bets could increase. As such, Sterling could make gains as pressure mounts on the BoE to curtail inflation.

For the Japanese Yen, January’s balance of trade figures are due to print late Wednesday. Analysts forecast that Japan’s trade deficit may increase further to ¥-3871.5B. If the data prints as forecast, the Yen may weaken due to the Japanese economy’s reliance on exports.

John Mulcahey

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