Pound Japanese Yen (GBP/JPY) Exchange Rate Plummets on Soft UK Data

February 5, 2018 - Written by John Cameron

STORY LINK Pound Japanese Yen (GBP/JPY) Exchange Rate Plummets on Soft UK Data

Japan Nikkei Services PMI Inches Upward, JPY Exchange Rates Climb

The Pound Japanese Yen (GBP/JPY) exchange rate tumbled on Monday as markets responded to unexpected growth within Japan’s service sector.

The Nikkei Japan services Purchasing Managers’ Index (PMI) jumped to a reading of 51.9 in January, up from the previous period’s 51.2 and beating the market forecast of a drop below the 50-point mark to 49.9.

This marked the highest reading since October 2017, with new orders quickening for the first time in three months, business confidence reaching its highest point since May 2013 and employment also seeing a small boost.

This result was all the more pertinent in that the markets had expected contraction, only to be greeted with growth - with anything below 50 points deemed contraction, and above; expansion.

Joe Hayes, Economist at IHS Markit shared his thoughts on the readings:

‘January PMI data shows continue growth in Japanese service sector output. Indeed, activity rose at a faster pace amid a stronger expansion in new business inflows’.

It should also be noted that the Japanese Yen’s appeal has been boosted by a fresh wave of risk aversion within the markets, with investors switching to the safe-haven currency in the wake of a global selloff in the equity markets.

Pound Japanese Yen (GBP/JPY) Exchange Rate Tumbles on Trifecta of Disappointing UK Data

The Pound (GBP) encountered some difficulty on Monday, encumbered by trifecta of disappointing PMI results.

Monday saw the release of the UK’s services PMI, which printed at 53.0 in January, down from the previous period’s 54.2 and the forecast of 54.1.

This marked a 16-month low and rounded off an extremely sluggish start-of-the-year performance for the UK’s private sector – a hat-trick of sub-par results after last week’s poor construction and manufacturing readings.

Chris Williamson, Chief Business Economist at IHS Markit shared his thoughts on the readings:

‘The pace of UK economic growth slowed sharply at the start of the year as January saw a triple whammy of weaker PMI surveys. Service sector expansion slid to a 16-month low, reflecting a marked waning in growth of demand for business and consumer-facing services such as hotels and restaurants’.

Despite this fall the services PMI did reveal an uptick in employment and new business, however, with companies expressing a positive outlook for the future of their businesses.

BoE Rate Decision Looms – What can Markets Expect for the GBP/JPY Exchange Rate?

Anticipation is building for the Bank of England’s (BoE) first interest rate decision of 2018, with markets hoping for an optimistic accompanying statement and possible hints of a hawkish policy move in May.

Whilst the BoE is not expected to raise interest rates on Thursday, markets have begun to expect a hawkish shift in outlook from the bank as a result of the better-than-expected UK growth readings, and growing optimism regarding the UK’s economic future post-Brexit.

The financial services company UBS has also stoked the fires by forecasting a rate hike in May, citing better-than-expected Q4 GDP.

It should be stressed, however, that both the UBS and bank Governor Mark Carney have asserted that this will be highly dependent on how Brexit negotiations fare - particularly the level by which business confidence returns and with it, investment.

If the BoE proves optimistic then the GBP/JPY exchange rate will likely claw back its losses.

If the central bank proves dovish, however – closing the door on a rate hike as early as May – then the GBP/JPY exchange rate could extend its fall.

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TAGS: Pound Yen Forecasts