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Japanese Yen: GBP/JPY Exchange Rate Close to 8-Year Best

March 20, 2024 - Written by Frank Davies


The Pound to Yen exchange rate (GBP/JPY) spiked higher after the Bank of Japan policy decision and came close to 8-year highs above 191.00 before settling around 190.85.

The Pound to Euro (GBP/EUR) exchange rate has remained in tight ranges and traded just below 1.1700 in early Europe.

Markets will now be looking at the UK data and Bank of England (BoE) policy decision this week.

The Bank of Japan ended the policy of negative interest rates with the first increase for 17 years with rates at 0.0-0.1%.

The policy of controlling yields was also dropped, although the bank will still buy bonds to keep yields in check.

Bank Governor Ueda commented; “We judged that achieving the goal of sustainable 2% inflation has come within view. “The large-scale monetary easing policy served its purpose.”

According to Credit Agricole; “the BoJ maintained its view that the economy is recovering moderately, but notes some weakness in the economy. This, as our economists indicate, does not signal the BoJ is about to engage in several rate hikes.”

MUFG is not convinced that yen selling is justified; “We are unconvinced that this initial market reaction signals what’s to come. The reality is that the guidance has likely been left purposely vague to provide flexibility. However, Governor Ueda was also clear that upside inflation risks and/or stronger economic data would be enough to indicate additional rate hikes going forward.”

It added; “The BoJ is now essentially data-dependent which is a big change in the BoJ reaction function and opens up the scope for greater FX volatility that should discourage a further build-up of yen carry positions at these weaker yen levels.”

According to ING; “recent headlines are suggesting that further rate hikes may be forthcoming now that the virtuous link between wages and prices has been confirmed.”

MUFG did note the potential for further near-term yen selling, especially if there is a hawkish Federal Reserve stance and higher US bond yields.

Nevertheless, the bank expects that the Japanese currency will eventually gain ground.

It added; “over the medium-term we view today’s announcements as hugely significant that is consistent with higher yields and a stronger yen.”

ING also pointed to the risk of near-term yen selling; “The problem for the yen, however, is that volatility remains exceptionally low and the carry trade exceptionally popular. USD/JPY may well trade in a 150-152 range for the time being (locals in Tokyo think the BoJ will not intervene to sell USD/JPY until 155).

It added; “a lower USD/JPY will have to be led from the dollar side.”

Commerzbank considers that further action will be needed to support the yen; “Only if the BoJ hints at further rate hikes, which would indicate a real rate hike cycle, will the Yen benefit more. Anything else has been priced in after the statements of the past few weeks.

Credit Agricole also noted the potential for action to support the yen, especially with the Federal Reserve policy meeting on Wednesday; “Investors will also have to be back on verbal intervention watch given USD/JPY has pushed back above 150. Post the FOMC meeting outcome will be particularly fertile ground for verbal intervention.”

The UK calendar is light on Tuesday, but there are major events over the following two days with the latest inflation data on Wednesday.

Consensus forecasts are for the headline rate to decline to 3.5% from 4.0% previously with the core rate expected to decline to 4.6% from 5.1%.

Lower than expected data would increase speculation over an early BoE rate cut.

According to Barclays; "A print closer to 3.2% could lead the (BoE) to soften its guidance language a bit more which could liven up market bets for a May cut.”

A shift in expectations towards a May cut would tend to undermine the Pound in global markets.
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