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GBP to JPY Exchange Rate Pushed Back from Highs as US Politics Boost Safe Haven Demand

October 23, 2020 - Written by Tim Boyer

Demand for safe havens like the Japanese Yen is rising again today, so the British Pound to Japanese Yen (GBP/JPY) exchange rate has been knocked slightly from its best levels following this week’s impressive jump. Rising hopes for a Brexit deal to be agreed over the coming month have kept the Pound buoyed, but if US political uncertainty continues to boost safe haven demand in the coming weeks then the Pound’s potential for gains may be limited.

Since opening this week at the level of 136.14, GBP/JPY has been trending with an upside bias. In the middle of the week, GBP/JPY touched on a weekly high of 137.61 as Brexit hopes pushed the Pound higher.

After touching on that high, GBP/JPY fell back slightly. Still, GBP/JPY is on track to end the week well above the week’s opening levels, as it trends in the region of 136.91 at the time of writing.

GBP Exchange Rates Fail to Hold Best Levels as UK Data Worsens Coronavirus Jitters

Earlier in the week, investors piled into the Pound in reaction to news that the UK and EU had agreed to extend Brexit talks.

As it followed a week of uncertainty, with UK officials saying they had moved away from talks, it came as a big relief to investors.

Not only this but it boosted confidence that a deal would be reached, as the agreement to more talks was seen as a signal that both sides wanted a deal.

According to John Goldie, FX Dealer at Argentex:

‘Anything that brings a deal - any deal - closer to the table is going to see sterling strengthen. Anything that highlights the risk of no-deal is going to see sterling weaken,

Sterling dropped on the risk of no-deal being highlighted, but actually we didn’t break new lows or anything... but on the prospect that we are still willing to compromise, we’ve broken new highs. So it’s almost like the market wants to see a deal be done,’

Despite this optimism, the Pound was dragged back from its best levels slightly at the end of the week by some underwhelming UK data.

Today’s UK PMI projections showed that Britain’s key services sector is being hit worse than expected by the second wave of the coronavirus pandemic. It hit UK recovery expectations and concerned analysts.

According to George Bukley and Chiara Zangarelli, Analysts at Nomura:

‘The UK PMI has recovered more quickly thus far than its European counterparts, but it lost more ground in today’s October print and the declines are unlikely to stop there. Our view of a lopsided-W shaped recovery in the UK (i.e. a second, but smaller, dip in GDP over the winter months) points to the need for more policy easing from the Bank of England at next month’s meeting.’

JPY Exchange Rates Advance as US Political Uncertainty Boosts Safe Havens

The Japanese Yen is a traditional safe haven currency, a currency which is often more appealing in times of global market uncertainty as investors seek out ways to shield their assets.

As a result of this safe haven appeal, the Yen has seen benefit from the worsening global coronavirus pandemic, as well as US political uncertainty.

US political uncertainty rose a little last night, leading to a late-week rise in demand for safe havens.

It came amid the second 2020 US Presidential Debate. The debate was seen as more measured than the first debate, and a better performance for US President Donald Trump.

If Trump’s polling figures improve, fears of a tight election next month will rise. There are fears that a close election could be contested and lead to a period of broad uncertainty in the US.

These factors were the primary cause of a stronger Yen today. Japan has upgraded its view on consumption and inflation was a little better than expected, but overall the nation’s outlook has not changed enough to influence Yen movement much.

GBP/JPY Exchange Rate Forecast: Politics-Inspired Movement Likely to Intensify

The Pound to Japanese Yen exchange rate could shed some of its recent gains in the coming week if global market uncertainty intensifies.

As October draws to an end, the focus on key November political events like UK-EU Brexit negotiations and the 2020 US Presidential Election will only rise.

If US polling becomes tighter with mere weeks until the election, fears of a contested election will rise too. This would lead to higher market demand for safe haven currencies and is the thing most likely to lead to Yen strength next week.

The Pound may be in for higher demand next week as well though.

If Brexit negotiations are seen as productive, it could boost hopes that a Brexit deal of some kind could be secured, which would boost Pound appetite and could lead to further GBP/JPY gains.

Amid a lack of major UK data due next week, political news is highly likely to overshadow ecostats. Japan’s retail sales results are unlikely to be too influential either.

Developments in the global coronavirus pandemic will influence the Pound to Japanese Yen exchange rate as well.
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