Pound Japanese Yen (GBP/JPY) Exchange Rate Weakens despite Poor Japanese Data
The Pound Japanese Yen (GBP/JPY) exchange rate has trended softly lower this morning as the Japanese Yen (JPY) attracts risk-off support amid bearish market sentiment. Meanwhile, Pound investors dial back rate cut expectations as UK inflation printed above forecasts.
At the time of writing, GBP/JPY is trading at ¥187.736, attempting a recovery as the European trading session commences.
Pound (GBP) Trades Sideways on Mixed Stimuli
The Pound is trending in a narrow range against its peers this morning as risk aversion caps gains for the currency. On the other hand, expectations for a hawkish Bank of England (BoE) may be providing some support to GBP as rising inflation diminishes the chances of an imminent interest rate cut.
Yesterday, it was revealed that UK inflation in December rose from 3.9% to 4%, rather than softening to 3.8% as forecast. BoE policymakers suggested that disinflationary deviations may be expected as the central bank strives to bring inflation back down to 2%, but markets nevertheless responded with bullish optimism.
According to Reuters analysts, interest rate swaps showed 12 basis points of BoE rate cuts were priced in by May following the release – implying a 50-50 chance of a quarter-point cut that month, down from an 80% chance on Tuesday.
Speaking from Davos, IMF Deputy Managing Director Gita Gopinath emphasises that expectations for rate cuts supposes that central banks’ work in addressing inflationary pressures is complete. She tells Bloomberg:
‘The job is not done. I think markets are being a little exuberant expecting as many rate cuts as they’ve put in. I think it’s important to be cautious, tame the time, look at all the data that’s coming in and then move slowly. And that’s consistent with what you’re hearing from central bankers.’
Japanese Yen (JPY) Benefits from Risk-Off Mood
The Japanese Yen, while easing gradually higher against the Pound, faces headwinds today following yesterday’s dismal machinery orders data for November.
A risk-off market mood is benefitting JPY, given its safe-haven status; yet gains are capped in light of weak domestic data. Japan’s cabinet office reported yesterday that the country’s core machinery orders, which exclude those for ships and electric power companies, fell 4.9% month-on-month in November 2023, driven mainly by a 7.8% drop in the manufacturing sector.
Also capping support for the currency are expectations that the Bank of Japan (BoJ) will maintain its dovish stance this month. Tomorrow’s inflation data is expected to reveal that Japanese inflation softened in the year to December, likely encouraging the BoJ to maintain its loose monetary policy settings.
However, bearish market sentiment is likely to persist given conflict in the Middle East and fears of sustained economic weakness in China: the country’s annualised GDP reading for Q4 printed below expectations yesterday, while unemployment rose unexpectedly.
In domestic terms, Japan is still reeling from an earthquake on New Year’s Day which killed at least 222 people. The government has set aside 1 trillion yen in disaster relief funds, as Chief Cabinet Secretary Yoshimasa Hayashi told reporters:
‘It is important to take all possible financial measures to enable a seamless response to rebuild the livelihoods of quake victims, as well as the restoration of the affected areas.’
GBP/JPY Forecast: Japanese Inflation in the Spotlight
Later today, traders may reposition ahead of Japan’s inflation release and tomorrow’s retail data from the UK.
Sales are expected to have fallen in December, as the appeal of Black Friday discounts no longer served as an incentive: purchases surged by 1.3% in November 2023, marking the strongest growth in retail activity since January.
Elsewhere, market mood is likely to influence currency dynamics, with persistent risk-off sentiment favouring the Yen over the more volatile Sterling. As the humanitarian crisis in Gaza worsens, heightened international attention to the Israel-Palestine conflict serves to undermine trading confidence.