Hopes for a more optimistic Brexit outlook briefly cause a surge in demand for the British Pound to Japanese Yen (GBP/JPY) exchange rate last week. However, due to fresh uncertainties and another market rush for ‘safe haven’ currencies, GBP/JPY has already shed last week’s gains.
Last week saw GBP/JPY open at the level of 142.84, and the pair climbed for most of the week. On Thursday, GBP/JPY briefly touched on a 3-week-high of 145.61, but ultimately ended the week nearer 143/84. This week so far GBP/JPY has continued to slide and trended near the level of 142.68 at the time of writing.
When markets opened this week, the Pound lost a lot of the bullishness it saw last week amid fresh concerns about Brexit disagreements between the UK and EU.
EU Chief Negotiator Michel Barnier has criticised key parts of the UK Brexit plan, but UK Prime Minister Theresa May has indicated the government will hold its ground on the plan.
This once again worsened concerns that UK-EU Brexit negotiations could struggle to overcome major obstacles and could even end without a deal.
On top of Brexit jitters, the Pound’s appeal has been limited as August’s UK PMIs from Markit have been disappointing so far. Monday’s UK manufacturing PMI slipped to 52.8, while the construction PMI fell to 52.9 on Tuesday.
Still, the Pound’s losses slowed on Tuesday thanks to developments regarding the Bank of England (BoE). Speculation rose that BoE Governor Mark Carney could extend his term at the helm of the bank into 2020 or even 2021.
Amid broad Brexit uncertainties, the possibility of more consistency in the Bank of England outlook would be relieving to investors. This made the Pound slightly more appealing on Tuesday.
Still, the Pound was able to advance due to sturdy demand for the Japanese Yen. Investors have been buying the Japanese Yen this week amid higher demand for ‘safe haven’ currencies.
Towards the end of last week, US-China trade tensions flared up again in expectations that US President Donald Trump was preparing to implement even more controversial trade tariffs on US imports of Chinese goods.
A perceived fallout in US-Canada trade negotiations also made investors hesitant to take risks, and bolstered demand for ‘safe haven’ currencies like the Japanese Yen.
While the primary reason for the Japanese Yen’s sturdy performance this week has been market demand for ‘safe havens’, Japanese data has been supportive too.
Monday’s Japanese manufacturing PMI from Nikkei edged higher from 52.3 to 52.5 as expected, while Q2 capital spending unexpectedly surged from 3.4% to 12.8%.
Yen investors were also still pleased about last Friday’s Tokyo CPI figures, which beat expectations.
Looking ahead, political developments are likely to continue to drive the Pound to Japanese Yen exchange rate in the second half of the week.
As UK-EU Brexit negotiations accelerate, any optimistic developments are likely to make the Pound more appealing and could help GBP/JPY to begin advancing again.
Of course, the Yen will continue to be driven by market risk-sentiment. If investors remain hesitant to take any risks, the Yen is likely to stay appealing and this could lead to further GBP/JPY losses.
Upcoming data may have an influence on the Pound to Yen exchange rate too, especially Wednesday’s services PMIs.
Japan and Britain’s August services PMIs will both be published on Wednesday. Britain’s in particular could give investors a better idea of how Britain’s economy performed last month, due to the UK economy’s reliance on services.
Japanese coincident index and leading economic index data due on Friday could also influence some late-week Yen movement. Overall though, Brexit and risk-sentiment news is most likely to drive the Pound to Japanese Yen exchange rate.