Market Risk Appetite Helps to Lift Pound Japanese Yen Exchange Rate
A general improvement in market risk appetite helped to shore up the Pound to Japanese Yen (GBP/JPY) exchange rate.
Demand for the Japanese Yen (JPY) weakened in the face of increased market demand for higher-yielding assets as worries over the global economic outlook temporarily diminished.
With monetary policy around the world looking set to remain accommodative for some months to come investors saw little reason to maintain a sense of safe-haven demand.
Lingering optimism over the pace of the UK’s rollout of Covid-19 vaccines offered continued support to Pound Sterling (GBP), meanwhile.
As the UK economy appears on track to return to normal sooner than its rivals, thanks to the speed of the vaccination programme, GBP exchange rates found fresh traction on Thursday.
Weaker UK Services PMI Forecast to Drag on GBP Exchange Rates
However, support for the Pound could well falter ahead of the weekend if February’s UK manufacturing and services PMIs fail to impress.
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.
As a result, any fresh weakness in the PMI could weigh heavily on the Pound, leaving the GBP/JPY exchange rate exposed to renewed selling pressure on Friday.
After the disappointing drop to 39.5 seen in January investors remain wary of the potential for a similarly weak month of service sector activity.
As long as the PMI remains trapped below the neutral baseline of 50 the odds of a negative first quarter gross domestic product reading look set to increase.
Even if the manufacturing sector continues to show solid growth on the month this may not be enough to limit the impact of a weak services PMI reading.
Another negative GfK consumer confidence index figure could also put pressure on the Pound to Japanese Yen exchange rate.
Japanese Yen Vulnerable to Negative Inflation Rate
Worries over the health of the Japanese economy may ease, on the other hand, with forecasts pointing towards an improved manufacturing PMI.
If the manufacturing sector can escape a state of contraction this would paint a more encouraging picture of the economic outlook, even in the face of ongoing Covid-19 disruption.
However, a greater source of Japanese Yen volatility looks set to come on the back of January’s inflation data.
With inflation expected to remain negative on both the month and the year the Japanese Yen could face a fresh round of selling ahead of the weekend.
As long as inflation continues to languish the case for further Bank of Japan (BoJ) policy action looks likely to increase, to the detriment of JPY exchange rates.
Even so, if the general sense of market risk appetite deteriorates this could still help to drag the Pound to Japanese Yen exchange rate lower.