Pound Japanese Yen (GBP/JPY) Exchange Rate Rallies Thanks to Brexit Trade Talks Reprieve

December 14, 2020 - Written by Frank Davies

STORY LINK Pound Japanese Yen (GBP/JPY) Exchange Rate Rallies Thanks to Brexit Trade Talks Reprieve

Easing Fears of No-Deal Brexit Offer Boost to Pound Japanese Yen Exchange Rate

The Pound to Japanese Yen (GBP/JPY) exchange rate rallied strongly on Monday as anxiety over a potential no-deal Brexit outcome temporarily diminished.

As the UK and EU agreed to extend trade talks further in the hopes of reaching a deal the mood towards the Pound improved markedly.

Markets moved to price in higher odds of a possible deal, giving GBP exchange rates a solid boost across the board at the start of the week and erasing much of Friday’s losses.

While talks still have the potential to end without an agreement in place this was not enough to put any dampener on the GBP/JPY exchange rate for the time being.

With market risk appetite generally improving, especially in the face of the latest moves towards the rollout of Covid-19 vaccines, the Japanese Yen was left on the back foot against its rivals.

GBP/JPY Exchange Rate Vulnerable to Rising UK Unemployment Rate

However, the GBP/JPY exchange rate could struggle to hold onto all of its gains in the days ahead thanks to the release of the latest UK economic data.

With the UK unemployment rate forecast to rise from 4.8% to 5.1% in October worries over the health of the labour market look set to rise on Tuesday.

As job losses continued throughout the course of the fourth quarter the unemployment rate looks set to rise even further in the months ahead.

A higher unemployment rate would not bode well for the outlook of the UK economy, with joblessness likely to translate into lower consumer spending and confidence.

With a weak labour market appearing set to drag on the gross domestic product in the fourth quarter the appeal of the Pound looks likely to weaken once again.

Unless the labour market can demonstrate greater signs of resilience in the face of the ongoing Covid-19 crisis the GBP/JPY exchange rate could cede back some of its gains.

Narrowed Trade Surplus Forecast to Drag Japanese Yen Lower

Support for the Japanese Yen may well remain muted in the coming week, though, as long as market risk appetite remains buoyant.

Without an increase in safe-haven demand JPY exchange rates look set to stay on the back foot, especially with forecasts pointing towards weakness in the latest Japanese data.

As the trade surplus is forecast to narrow from 872.9 billion to 529.8 billion in November this could undermine confidence in the health of the Japanese economy.

Weaker trade conditions would increase the likelihood of the economy experiencing another weak quarter in the final three months of the year, adding to the dovish bias of the Bank of Japan (BoJ).

Unless December’s manufacturing and services PMIs can return to a state of expansion the GBP/JPY exchange rate could benefit from another bout of anxiety over Japan’s outlook.

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TAGS: Pound Yen Forecasts