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Pound Japanese Yen (GBP/JPY) Exchange Rate Strengthens on Unexpected UK Retail Sales Growth

November 20, 2020 - Written by Frank Davies

Pound Japanese Yen (GBP/JPY) Exchange Rate Gains Ground Thanks to UK Retail Sales Growth

UK retail sales delivered unexpected monthly growth in October, helping to keep the Pound to Japanese Yen (GBP/JPY) exchange rate on a stronger footing ahead of the weekend.

Investors were encouraged as retail sales strengthened 1.2% on the month, as opposed to stagnating as originally forecast.

This suggests that UK consumers took a less negative outlook at the end of the third quarter, although the increase in spending could also be attributed to the impending second national lockdown.

Either way, as stronger levels of consumer spending have previously helped to shore up economic activity in the UK this positive reading encouraged hopes in the relative strength of the third quarter gross domestic product.

The mood towards the Japanese Yen, meanwhile, proved muted in the face of the latest bout of market optimism over progress towards the widespread distribution of a Covid-19 vaccine.

Underwhelming UK PMIs Forecast to Weigh on GBP/JPY Exchange Rate

However, the GBP/JPY exchange rate may struggle to hold onto its positive footing on Monday with the release of November’s flash UK manufacturing and services PMIs.

With forecasts pointing towards a marked slowdown on the month for both sectors the appeal of the Pound could easily weaken.

Particular focus looks set to fall on the services PMI, given that the sector still accounts for more than two thirds of the UK gross domestic product.

Investors expect to see the services PMI fall into contraction territory, dipping from 51.4 to 42.5 on the month as a result of the national lockdown.

Such a sharp deterioration in sector activity would weigh heavily on GBP exchange rates, with a weak reading here significantly increasing the risk of a negative fourth quarter GDP.

As long as the UK economy appears on track to return to a state of recession before the end of the year the strength of the Pound looks set to diminish further.

Safe-Haven Demand May Shore up Japanese Yen Exchange Rates

On the other hand, with fresh Japanese data releases largely lacking in the first half of the next week support for the Japanese Yen may also prove limited.

As long as markets remain in an optimistic state over progress towards a Covid-19 vaccine and the end of the current global crisis the appeal of the safe-haven currency is likely to remain muted.

Without any major shift in market risk appetite JPY exchange rates may remain biased to the downside in the days ahead.

Unless investor confidence falters once again, given the fact that any return to normality still seems some months away, this could limit the downside potential of the GBP/JPY exchange rate.
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