GBP JPY Exchange Rate Picks up as Japanese Service Sector Slows to Near-Stagnation

October 3, 2018 – Written by Tim Boyer

A weaker-than-expected UK services PMI was not enough to drive the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate lower on Wednesday.

While the services PMI softened from 54.3 to 53.9 in September the sector remains firmly within a state of expansion, even in the face of mounting Brexit-based jitters.

Although signs still point towards weakening business confidence and a muted economic outlook in the months ahead the mood towards the Pound did not sour significantly in the wake of the data.

Demand for the Japanese Yen, meanwhile, faltered as Japan’s services PMI slumped from 51.5 to just 50.2, coming dangerously close to stagnation.

This undermined confidence in the health of the Japanese economy, prompting investors to pile out of the Yen.

An easing sense of market risk aversion also put pressure on the safe-haven Japanese Yen, with investor fears over the possibility of a fresh Eurozone crisis having diminished.

Disappointing Round of UK PMIs Limit Pound Japanese Yen Exchange Rate Upside

September’s raft of UK PMIs are unlikely to offer support to GBP exchange rates in the long term, however, as signs still point towards an increasingly pressured domestic economy.

After the second quarter’s lacklustre gross domestic product reading investors are wary of the prospect of growth turning increasingly sluggish in the third quarter.

As James Smith, Developed Markets Economist at ING, noted:

‘For Bank of England policymakers, the underlying story paints a mixed picture.

‘On one hand, the Markit/CIPS press release again talks about firms operating at stretched capacity, given the increasing challenge in recruiting specialist staff. This, in turn, is forcing firms to lift salaries in a bid to attract/retain talent and suggests the better wage growth momentum we’ve seen this year is set to persist.

‘That makes it likely that the Bank of England officials will continue to talk up the prospects of further tightening, but with Brexit risks mounting, realistically we think another rate hike before March 2019 is unlikely.’

Theresa May’s latest speech on the subject of Brexit did not offer any particular support to GBP exchange rates, meanwhile.

As May noted that she is not afraid to exit the EU without any deal in place the odds of a hard Brexit increased once again.

This stance naturally gave markets fresh cause for concern, with the prospect of a no-deal Brexit already weighing heavily on the outlook of the UK economy.

Even so, if the threat of a leadership challenge against May diminishes this may give the Pound a fresh boost.

As long as a sense of political uncertainty continues to hang over the UK, however, the GBP/JPY exchange rate remains vulnerable to downside pressure.

Japanese Yen Looks Vulnerable as Market Risk Appetite Strengthens

With domestic data continuing to paint a rather glum picture the Japanese Yen remains reliant on wider market sentiment to strengthen against its rivals.

After the announcement of a new US-Canada trade deal and easing worries over the budget conflict between the Italian government and the EU risk appetite has generally picked up.

This has limited the support for the lower-yielding Yen, even though global trade tensions still look at risk of flaring up afresh.

With NAFTA renegotiations dealt with the Trump administration looks set to turn increasing attention towards Japan, raising the risk of a trade spat.

If the US threatens to impose tariffs on Japanese exports this could weigh heavily on the Japanese Yen, given the existing weakness of the domestic economy.

However, JPY exchange rates could find some support if Friday’s leading and coincident indexes show an improvement on the month.

Any signs of strength within the Japanese economy may give the Yen a boost against its rivals, even though a positive reading here is unlikely to alter the weaker economic growth trajectory.

Disappointing figures, on the other hand, would leave the Japanese Yen vulnerable to fresh selling pressure.

If market risk appetite falters in response to stronger US labour market data, though, the GBP/JPY exchange rate may still struggle to gain ground ahead of the weekend.

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TAGS: Pound Yen Forecasts