The Pound has surged this week after recovering from sharp drops on Monday. Increased Brexit confidence left Sterling stronger and it has been able to capitalise on limo demand for ‘safe haven’ currencies like the Japanese Yen. GBP/JPY trended near a weekly high of 141.46 at the time of writing.
Pound (GBP) Benefits from UK Government’s Brexit Confidence
Markets began the week concerned that the UK was going to become anti-trade following the Brexit and fully withdrawing from the EU single market.
However, a Brexit speech from UK Prime Minister Theresa May has bolstered confidence significantly. She stated while full single market access would not be possible in post-Brexit UK, the government and Parliament would work together to ensure UK gets the best possible UK-EU trade deal before entering it into law.
Investors were most impressed by the reconfirmation that a final Brexit deal would be passed through Parliament and by May’s indication that the UK would be a tough negotiator that would rather take no deal than a bad deal for Britain.
This news kept Sterling buoyant throughout the week as investors largely brushed over domestic ecostats.
Japanese Yen (JPY) Slips on Faltering ‘Safe Haven’ Demand
Investors appear to have lost some faith in 2017’s US inflation outlook this week, as traders continue to favour high yielding risk-correlated currencies over ‘safe haven’ investments like the Japanese Yen (and US Dollar/USD).
While analysts hope for increased inflation in the Japanese economy this year, this depends on how successful the fiscal policies of US President-elect Donald Trump will be. Markets previously hoped strong US inflation would influence inflation in other major economies like Japan.
Trump is expected to take office this week and has not gone into further detail on his economic plans for quite some time, bullish inflation sentiment has slipped slightly.
As a result, the Japanese Yen has also been weakened against the Pound as investors sell safer currencies.
GBP/JPY Forecast: Further Gains may be Ahead for Sterling
The Pound to Japanese Yen exchange rate could continue to advance in the coming week, as Brexit trade hopes may increase even further after the UK Supreme Court announces its highly anticipated judgement on the UK government’s court challenge.
Last year, the UK government challenged a High Court decision that Article 50 must be activated through Parliament rather than just the government.
If Supreme Court upholds the High Court’s decision this will increase hopes that UK Parliament will aim to make single market access a part of Brexit negotiations. However unlikely it may be to succeed, this hope would improve the short-term Pound outlook.
As for the Japanese Yen, its movements will highly depend on the first actions Donald Trump takes as US President, after his inauguration on Friday.
If Trump quickly makes moves to begin economic stimulus, the Japanese Yen is likely to gain against the Pound as traders rush to ‘safe haven’ currencies.
On the other hand, disappointing or a lack of action from Trump over the weekend could extend the market’s demand for risky currencies which will leave JPY weaker.