Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate Slips as UK Manufacturing Disappoints
After a solid day of gains the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate came under fresh pressure thanks to a weaker-than-expected UK manufacturing PMI.
Demand for Pound Sterling (GBP) generally weakened as the headline manufacturing index fell to a three-month low of 54.0 in July.
This suggests that the UK economy did not start off the third quarter on the strongest of footings, undermining market confidence in the domestic outlook.
While investors remain optimistic over the prospect of an imminent Bank of England (BoE) interest rate hike this weaker data could discourage some policymakers.
As Rob Dobson, Director at IHS Markit, commented:
‘The prices picture remained mixed in July. Cost inflation eased, whereas selling prices rose at the quickest pace in five months. The financial markets still seem to have an interest rate increase nailed on for August. However, if the combination of weaker growth and a softening of pipeline cost pressures at manufacturers is mirrored in the larger service sector, the Bank of England’s decision will be far from unanimous and they may even yet find some cause for pause.’
Dovish BoJ Outlook Boosts GBP/JPY Exchange Rate
After the Bank of Japan (BoJ) reasserted its dovish policy stance on Tuesday the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate saw a sharp uptick.
Investors were not impressed by the prospect of the BoJ maintaining its loose monetary policy for the foreseeable future, especially as other major central banks continue to shift towards policy tightening.
As the Japanese economy remains in a relatively sluggish state of growth the BoE sees little reason to make any move towards policy normalisation, to the disappointment of markets.
This left the Japanese Yen (JPY) under pressure even as the general sense of market risk appetite declined in response to signs of weakening Chinese growth.
Any softness in the latest Japanese services PMI could encourage JPY exchange rates to shed further ground ahead of the weekend.
Pound Sterling Japanese Yen (GBP/JPY) Exchange Rate Volatility Forecast on BoE Decision
If the BoE fails to deliver an interest rate hike on Thursday this could see the Pound Sterling to Japanese Yen (GBP/JPY) exchange rate slump significantly.
With high odds of a rate hike already priced into the Pound a hesitation on the BoE’s part would leave GBP exchange rates exposed to downside pressure.
However, the Pound could also lose ground if the Monetary Policy Committee (MPC) delivers a dovish interest rate hike.
Any downgrades in the third quarter Inflation Report may also weigh heavily on demand for the Pound, especially if forecasts prove less positive on the subject of the economic outlook.
Unless the BoE signals some level of confidence in the future of the UK economy the Pound Sterling to Japanese (GBP/JPY) exchange rate could return to a softer footing.