On Friday, the GBP/JPY currency pair experienced a marginal decrease of a tenth of a percent, hovering just above the 191.000 mark. This slight dip can be attributed to the converging interest rate expectations between the UK and Japan, which have diminished the appeal for investors to hold onto Pound Sterling (GBP) in comparison to the Japanese Yen (JPY), consequently exerting downward pressure on the exchange rate.
In the UK, dwindling inflation expectations have fueled speculation among investors that the Bank of England (BoE) might implement interest rate cuts in June. Such anticipation has weakened the Pound Sterling, as lower interest rates typically lead to a reduction in foreign capital inflows.
Conversely, Japan’s Bank of Japan made headlines during its March meeting by increasing interest rates from an exceedingly low, negative 0.1% level. This decision prompted speculation among investors about whether it marks a singular event or the initiation of a cycle of rate hikes, potentially bolstering the Yen over the long term.
In a recent interview with the Asahi Shimbun, Bank of Japan (BoJ) Governor Ueda hinted at the possibility of further interest rate hikes, citing accelerating inflation. Ueda emphasized that the positive outcomes of the Shunto spring wage negotiations are expected to translate into increased wages throughout the summer, subsequently leading to higher consumer prices later in the year.
Meanwhile, in the UK, the latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February revealed a cooling trend in selling prices and wage inflation anticipated by most firms over the next year. Selling price expectations eased to 4.1% from 4.3%, marking the lowest reading in over two years, while wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.
Bank of England Governor Andrew Bailey’s recent comments regarding market expectations for two or three rate cuts this year have further fueled speculation that the BoE might indeed implement rate cuts in June.
Additionally, soft Services PMI data for March, released on Thursday, has influenced the UK’s economic outlook, providing further rationale for potential interest rate cuts by the BoE. The UK Services PMI fell to 53.1, missing expectations and the previous reading of 53.4.
However, amidst this mixed economic backdrop, not all UK data has been negative. A recent report by the UK’s largest building society, Nationwide, revealed the first rise in house prices since January 2023, as reported by the Guardian. This development follows BoE lending data showing a surprise increase in Mortgage Approvals, reaching their highest level since September 2022 in February.
