GBP/JPY has shown a steady rise recently, mainly due to the overall positive market sentiment that has led to a reduction in flows towards the safe-haven Japanese Yen. The positive lending data in the UK indicates that credit remains ample, adding to the bullish outlook for the Pound. Despite disinflationary trends in the UK, analysts believe that it may not be enough to prompt the Bank of England (BoE) into immediate action.
The recent sharp correction in GBP/JPY, with the pair falling from a peak of 200 to the low 193s in a single day, was attributed to suspected Forex market intervention by Japanese authorities to support the depreciating Yen. However, the lack of confirmation from Japan’s top currency diplomat, Masato Kanda, has left the intervention speculation in limbo. Kanda’s warning about the risks of excessive weakening of the Yen emphasizes the need for appropriate actions in the Forex market.
The bounce in GBP/JPY after the previous day’s correction appears to be more of a “mean reversion” effect rather than being driven by macro-economic data releases. The overall positive market mood, fueled by tech earnings and positive GDP releases in Europe, has contributed to the Yen’s weakening against most major currencies. The interest rate differential between the UK and Japan further supports a bullish backdrop for GBP/JPY.
Central Bank Policies
The Bank of England’s reluctance to cut interest rates, coupled with robust services inflation in the UK, contrasts with Japan’s disinflationary trends, making it unlikely for the Bank of Japan to raise its super-low rates. As long as investors seek higher returns by investing in Pounds rather than Yen, the appreciation of GBP/JPY is inevitable. The divergence in monetary policies between the two central banks plays a significant role in shaping the exchange rate dynamics.
Despite Japanese housing data showing a decline in housing starts, the effect on the Yen was relatively muted, with GBP/JPY continuing its upward trend. On the other hand, UK lending data, with higher-than-expected figures for net lending and consumer credit, reflects a scenario of ample lending and loose credit conditions. This environment may deter the Bank of England from hasty interest rate cuts, as higher rates attract capital inflows, supporting the Pound.
The release of UK inflation data, as indicated by the Consortium of British Industry’s Shop Price Index, revealed disinflationary pressures in April. Lower inflation rates could accelerate the timeline for a potential interest rate cut by the BoE. Despite disinflation in non-food items and a slowdown in food inflation, the Pound remains resilient. The lower inflation rates may prompt the BoE to reconsider its monetary policy stance in the future.
The exchange rate of GBP/JPY is influenced by a combination of market sentiment, macro-economic data, central bank policies, and inflation trends. The ongoing divergence in monetary policies between the UK and Japan, coupled with favorable market conditions, is likely to support the continued appreciation of GBP/JPY in the near term. Investors and traders monitoring these factors can gain insights into the potential direction of the currency pair in the dynamic foreign exchange market.