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Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate Recovers as UK Construction Sector Slows

February 4, 2019 - Written by Frank Davies

Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate Shakes off Disappointing Construction PMI

A weaker-than-expected UK construction PMI was not enough to prevent the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate trending higher on Monday.

Although the PMI slowed sharply from 52.8 to 50.6, falling closer to a state of contraction, the negative impact on the Pound ultimately proved limited.

The construction sector remains a minor contributor to the UK gross domestic product, allowing GBP exchange rates to shrug off the underwhelming data over the course of the day.

Even so, with firms expressing greater caution over Brexit the Pound looks set to remain under pressure in the days ahead.

On the other hand, the mood towards the Japanese Yen soured at the start of the week, even in the face of increased market risk appetite.

Slowing UK Service Sector May Drag Pound Sterling (GBP) Exchange Rates Lower

Demand for the Pound could diminish more significantly on Tuesday, however, if the UK services PMI also shows a sharp decline on the month.

As the service sector remains the main engine of UK growth a weaker showing here would leave the GBP/JPY exchange rate exposed to significant downside pressure.

In the wake of January’s underwhelming manufacturing and construction PMIs a weak services PMI is likely to boost bets of a softer first quarter gross domestic product reading.

Unless the sector can show signs of resilience in the face of persistent Brexit-based uncertainty the Pound may struggle to hold onto a positive footing against its rivals.

Japanese Yen (JPY) Exchange Rates to Benefit from Market Risk Aversion

Ongoing worries over the US-China trade dispute could offer the Japanese Yen encouragement in the near term, however.

As long as global trade relations remain tense the Yen will find support in the shape of safe-haven demand, benefitting from market jitters.

Even so, a weak performance from January’s services and composite PMIs may still dent JPY exchange rates on Tuesday.

Without evidence of an improving economic outlook the Japanese Yen may struggle to push higher against the Pound, given the long-running sluggishness of the Japanese economy.

Bank of England Dovishness Forecast to Dent GBP/JPY Exchange Rate

Further volatility is likely in store for the GBP/JPY exchange rate later in the week as expectations mount ahead of the Bank of England’s (BoE) first policy meeting of 2019.

Although no change in policy is expected at this stage the meeting minutes and quarterly Inflation Report could weigh heavily on the appeal of the Pound.

Signs that the BoE is taking a more cautious view of the domestic outlook are likely to drag GBP exchange rates lower on Thursday, especially if there is any indication of a dovish policy bias.

The quarterly Inflation Report could put significant pressure on the GBP/JPY exchange rate if forecasts point towards inflationary pressure easing in the months ahead.

Any decline in the odds of a 2019 interest rate hike are likely to dampen the mood towards the Pound.
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