Thanks to fading fears that a ‘no-deal Brexit’ is likely, as well as higher market appeal for taking risks, the British Pound to Japanese Yen (GBP/JPY) exchange rate has continued to rally this week so far. The Pound could be in for even further gains later in the week if there are notable Brexit developments.
Last week saw GBP/JPY make a significant jump from 143.41 to 146.42, and this week has already seen the pair gain yet another Yen. At the time of writing on Tuesday afternoon, GBP/JPY was trending near a two month high of 147.81.
Investors have had little reason to move on the Pound in recent sessions, but hopes that a ‘no-deal Brexit’ can be avoided have been enough to help it to keep advancing against the Japanese Yen.
The Pound is seeing steady demand as investors anticipate key UK data due for publication in the coming days, as well as potential Brexit developments later in the week.
However, the primary cause of Pound to Yen exchange rate gains this week so far has been lower market demand for safe haven currencies like the Japanese Yen.
Since Monday evening, the US and China have ramped up planned trade tariffs against one another as a trade war between the nations escalates.
However, as the US did not immediately implement its previously planned 25% tariffs on $200b of Chinese imports, instead only setting 10% tariffs, investors perceived the action as less harsh than previously expected.
Similarly, China’s newly announced retaliation of tariffs on $60b of US goods were also less severe than the plans China had previously proposed.
While some analysts warn that markets are too calm amid the latest escalation in trade tensions, the less severe than expected escalations were ultimately something of a relief to investors.
The news dampened market demand for safe haven currencies like the Japanese Yen, making it easier for the Pound to Yen exchange rate to climb.
Japanese Yen investors are also hesitant to buy the Yen ahead of Wednesday’s session, when the Bank of Japan (BoJ) will hold its September policy decision.
The bank is expected to leave monetary policy frozen, but any changes in the bank’s tone regarding monetary policy could influence market demand for the Japanese Yen. Japanese trade data from August could prove influential too.
Wednesday will also see the publication of Britain’s August Consumer Price Index (CPI) inflation rate results, which could prove influential if they disappoint investors.
Lower than expected UK inflation could dampen Bank of England (BoE) interest rate hike bets and weaken the Pound.
However, the Pound is even more likely to be influenced by Brexit developments instead in the second half of the week.
Investors are hoping for there to be notable developments in UK-EU Brexit negotiations during an EU summit towards the end of the week, which could cause some major Pound to Japanese Yen exchange rate movement.