US Political Pressure Boosts GBP/JPY despite UK Construction Weakness

August 2, 2017 - Written by Toni Johnson

STORY LINK US Political Pressure Boosts GBP/JPY despite UK Construction Weakness

The Pound Sterling to Japanese Yen exchange rate is notching up strong gains today after dovishness from a Bank of Japan (BOJ) board member, even though UK construction data leaves much to be desired.

GBP/JPY is now trending around 146.66.

UK Construction PMI Hits 11-Month Low but GBP Strengthens

Despite the presence of negative UK data, the British Pound has risen sharply against the Japanese Yen, notching up gains of 0.6%.

The latest UK construction PMI fell much-further-than-forecast, weakening from 54.8 to 51.9 instead of to 54.0.

This puts construction sector growth at an 11-month low, with commercial construction actually declining on the month.

IHS Markit Associate Director Tim Moore explained; ‘Worries about the economic outlook and heightened political uncertainty were key factors contributing to subdued demand. Construction firms reported that clients were more reluctant to spend and had opted to take longer in committing to new projects.’

However, political turmoil in the US is benefitting the Pound, as investors sell out of the US Dollar and turn to other currencies for safe-haven assets.

Markets are concerned by the latest developments in the Trump-Russia scandal, as it turns out the President helped draft the statement released by his son that claimed his meeting with a Russian lawyer was of little significance.

It turns out Donald Trump Jr actually decided to meet the lawyer after being offered information on Hillary Clinton.

President Trump’s involvement in the misleading statement could therefore amount to obstruction of justice, some ethics lawyers are claiming.

JPY Weakens after Cautious Comments from BOJ Board Member

Yukitoshi Funo, board member with the Bank of Japan (BOJ), warned today that both the government and the private sector needed to do more to help boost inflation.

The BOJ has been running an enormous stimulus programme in a drawn-out battle with weak inflationary growth and Funo’s comments have worried markets.

It seems the policymaker is admitting that even the BOJ’s enormous package of monetary stimulus measures is not sufficient to push consumer price growth up to the target level required before monetary policy can be tightened once more.

‘Japan's economy still has room to raise productivity when seen from a global perspective,’ Funo said. ‘Now is a good chance to proceed with structural reforms and growth strategies, because monetary conditions are very loose and the job market is tight. Japan should not miss this opportunity.’

While June saw household spending hit its highest level for two years on the back of strong availability of jobs, core inflation clocked in at only 0.4% on the year.

Funo commented that structural reforms were needed to boost demand and productivity and warned that, despite improving economic conditions, companies may be reluctant to raise wages.

Last month the BOJ delayed again the deadline for reaching its target inflation rate.

Bank of England Interest Rate Decision Ahead; Will a Hawkish Outlook Boost GBP?

Early-morning Japanese services and composite PMIs could cause some GBP/JPY turbulence, but the day’s main event will be the Bank of England’s (BoE) latest interest rate decision.

Several members of the Monetary Policy Committee (MPC) have recently sounded confident that the UK economy is ready to support another interest rate hike, including usually-dovish Chief Economist Andy Haldane.

However, since then inflation data has disappointed, falling back to 2.6% - enough to remove the pressure on policymakers, but not enough to relieve the pressure on consumer spending and therefore economic growth.

It remains to be seen whether Haldane will join likely hawks Ian McCafferty and Michael Saunders in voting for an interest rate hike.

Markets will also be curious to see whether new MPC member Silvana Tenreyro will be as dovish as analysis of past comments and interviews has suggested.

As if this wasn’t enough unknowns for markets to contend with, they will also be looking for clues regarding any intentions to change the current quantitative easing programme.

Ian McCafferty suggested last month that the BoE should reconsider its stipulation that QE won’t be unwound until interest rates are back towards 2%.

As a result, it would be an impressive feat if the MPC meeting revealed absolutely no new information for markets to digest.

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TAGS: Pound Yen Forecasts