Economic concerns continued to pile on top of the Pound on Thursday, exacerbating concerns about the potential effects of the Brexit process and knocking the British Pound to Japanese Yen (GBP/JPY) exchange rate lower. The Japanese Yen was able to easily benefit thanks to stronger market demand for safe haven currencies as US-China trade war jitters worsened again.
Last week saw GBP/JPY put in strong gains and climb from 146.78 to 148.72, due to Brexit hopes and US Dollar (USD) strength. However, this week so far the pair has shed most of those gains and at the time of writing was trending near the level of 146.78 again.
GBP Continues to Tumble as UK Retail Sales Disappoint Investors
This week as seen the Pound experiencing one of its worst selloffs in months, as Brexit uncertainties worsen in both political and economic news and make investors concerned about Britain’s economic outlook.
At the beginning of the week, the Pound slumped as UK Prime Minister Theresa May struggled to push Brexit plans through UK Parliament amid backbencher rebels within the ruling Conservative Party.
Some MPs believed the Brexit plan was not hard enough, while others argued it was not soft enough.
The fissures within the party have left investors anxious that they could make it difficult to pass any Brexit deal. This has made investors more anxious about the possibility of the Brexit process ending with no deal – a worst-case scenario hard Brexit.
Then on Wednesday, Britain’s June Consumer Price Index (CPI) inflation report fell short of forecasts in every major print, dousing Bank of England (BoE) interest rate hike bets and knocking the Pound lower.
Thursday’s UK retail sales report from June was largely a repeat of this. Monthly retail sales were forecast to slow to 0.2% but instead slumped from 1.4% to -0.5%, while the yearly figure fell from 4.1% to 2.9% rather than the expected 3.7%.
According to Kathleen Brooks from Capital Index, the weakness in retail sales was broad based rather than being only due to seasonal factors:
‘The details of the report are worth noting. Declines in UK sales last month were broad based with clothing and household goods leading the way. Not even the internet could boost the retail sales figures: non-store retailing saw volumes fall by 1.4%, and the annual rate for non-store or internet sales retreated to 9.8% in June, compared with 16.1% in May.’
JPY Supported by Safe Haven Demand and Japanese Data
The Japanese Yen’s gains were limited by broad strength in its rival, the US Dollar (USD), but it was still able to benefit from Pound weakness and push GBP/JPY much lower throughout the week.
Concerns about US President Donald Trump’s protectionist trade stances and the US-China trade war have left investors more eager to buy safe haven currencies like the Japanese Yen.
On Thursday, news that the Chinese Yuan (CHY) had slumped to its worst level against the US Dollar (USD) in a year spooked investors.
It indicated that Chinese policymakers were intentionally letting the currency fall as part of its plans to handle US trade tariffs and worsened trade war jitters.
On top of this, Japan’s June trade data indicated that Japan was thus far weathering the trade concerns, as the trade surplus strengthened more than expected to ¥721b.
GBP/JPY Forecast: Japanese Inflation in Focus
The Pound has been undermined by Brexit concerns and UK data this week, but it may not lose all of last week’s gains if Friday’s highly anticipated Japanese data falls short of forecasts.
Japan’s highly influential Consumer Price Index (CPI) inflation results from June will be published on Friday and are expected to have improved modestly from the previous figures.
Japan’s yearly inflation rate and core yearly inflation rate are both forecast to have edged higher from 0.7% to 0.8% in June.
If Japanese inflation falls short of forecasts, investors may become concerned about Japan’s economic outlook and Bank of Japan (BoJ) speculation may become more bearish again. This would limit the Japanese Yen’s strength and help GBP/JPY to recover slightly.
Next week’s GBP/JPY is likely to be quieter, with Britain and Japan’s economic calendars both relatively uneventful.
Instead, the Pound to Japanese Yen exchange rate is likely to be driven by developments in Brexit news and the US-China trade war.
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TAGS: Pound Yen Forecasts