GBP/JPY has seen gains in recent days due to positive data out of the UK, including strong PMI figures indicating a pick-up in business activity in August. The pair is currently trading in the 191.60s, with the Pound Sterling benefiting from the positive survey results. The S&P Global/CIPS Composite PMI rose to 53.4 in August, beating expectations and signaling growth in major sectors. This data has boosted GBP across all pairs and comes on the back of recent positive UK Retail Sales data showing growth in July after a decline in June.
While the UK has seen positive economic indicators, not all data has been favorable. Government borrowing was higher than estimated in July, and consumer confidence missed estimates in August. Factory orders also showed a mixed picture. Market expectations are currently pricing in a 0.25% cut by the Bank of England before the end of 2024, potentially leading to lower interest rates that could cap the value of the Pound. Analysts are also predicting potential rate cuts by the BoE before year end, further negatively impacting the currency.
On the other hand, the Japanese Yen strengthened after comments from BoJ governor Kazuo Ueda, stating that interest rates could rise if the economy and prices align with projections. The swaps markets imply a 36% probability of a BoJ rate hike by December following Ueda’s speech. However, there are concerns about Japanese inflation easing, making it difficult for the BoJ to normalize policy. Recent data showed a decline in CPI excluding fresh food and energy, falling below the 2.0% target for the first time since 2022.
Headline inflation in Japan remained steady at 2.8% in July, and CPI excluding fresh food rose to 2.7%. However, the rise was mainly due to the phasing out of energy subsidies, rather than increased demand. Services inflation in Japan also fell to 1.4% in July, despite claims of rising wages. Governor Ueda mentioned the possibility of raising interest rates if data aligns with BoJ projections, but the bank has already factored in a slowdown in underlying inflation in its forecasts. The BoJ’s median forecast for inflation excluding fresh food and energy for the fiscal year ending in March 2025 is 1.9%.
Overall, GBP/JPY has seen gains due to positive data out of the UK, while the Japanese Yen has strengthened on speculation of a potential rate hike by the BoJ. Concerns about Japanese inflation easing and the BoJ’s ability to normalize policy could impact the currency pair in the future. Additionally, market expectations of potential rate cuts by the Bank of England could limit the upside for the Pound Sterling. Traders will be closely monitoring economic data releases and central bank statements for further insights into the performance of GBP/JPY in the coming days.
