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Narrowed UK Trade Deficit Failed to Shore up GBP JPY Exchange Rate

February 10, 2017 - Written by Frank Davies

In spite of December’s UK trade deficit narrowing further than forecast alongside a surge in industrial production figures the Pound Sterling Japanese Yen (GBP JPY) exchange rate remained weak ahead of the weekend.

Solid UK Data Struggled to Boost GBP Demand

While the UK visible trade balance was found to have narrowed from -11.5 billion to -10.8 billion this was not enough to particularly boost the appeal of the Pound.

Even though the domestic economy continues to show signs of shrugging off the negative impact of the Brexit vote the mood towards Sterling remained muted, as investors remain jittery over the prospect of the Article 50 bill passing through the House of Lords without amendment.

The imminent departure of one of the more hawkish Bank of England (BoE) policymakers also limited the strength of the GBP JPY exchange rate during Friday’s European session, with the loss of Kristin Forbes suggesting that monetary policy could remain looser for longer.

JPY Under Pressure Ahead of Abe-Trump Meeting

Japan’s domestic corporate goods price index bettered expectations in January, showing a solid rebound on the year to rise from -1.2% to 0.5% and offering some encouragement with regards to the outlook of the economy.

However, the appeal of the Yen has remained generally muted as Prime Minister Shinzo Abe prepares to meet with Donald Trump, with markets nervous about the potential outcome of the meeting.

As analysts at TD Securities noted:

‘Of particular interest will be if any discussion over FX policy emerges. Trump has already openly criticized Japan as actively suppressing their currency but we suspect Abe will defer and deflect any criticism of such so as to not derail JPY performance since the US election. Overall, we think the tone should be cordial so we think references to FX policy – if noted - will be benign and geared towards enhancing this special relationship through mutually beneficially means.’

If comments are not seen to be encouraging, though, the GBP JPY exchange rate could experience a fresh uptrend going into the weekend.

GBP JPY Exchange Rate Forecast: Steady Japanese GDP Could Boost JPY

The Yen could see renewed bearishness at the start of next week as forecasts point towards a modest dip in in the annualised fourth quarter GDP.

Even so, expectations are a little more positive for the quarter-on-quarter figure, which is predicted to see steady growth of 0.3% and could help to ease worries that the Japanese economy remains under the threat of a return to recession.

In the meantime the Pound could come under pressure from concerns relating to the matter of Brexit, as the government’s Article 50 bill proceeds without amendment to the House of Lords.

If signs continue to point towards Theresa May being granted an effective blank cheque ahead of negotiations the odds of a hard Brexit are likely to increase, to the detriment of the GBP JPY exchange rate.
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