Pound to Yen Rate Retreats from 9-year Highs, Markets on BoJ Watch

February 14, 2024 - Written by Ben Hughes

STORY LINK Pound to Yen Rate Retreats from 9-year Highs, Markets on BoJ Watch

The Pound to Yen (GBP/JPY) exchange rate continued to make gains in Asia on Wednesday and posted 8-year highs just above the 190.0 level.

The Pound retreated after the UK inflation data and markets were also wary over potential intervention to curb yen losses.

Markets will be braced for high volatility if there is intervention to support the yen through the Bank of Japan with the UK GDP data another key event for the Pound.

Overnight, Japanese Finance Minister Suzuki commented; "We are watching the market even more closely, rapid moves are undesirable for the economy."

Japan's top currency diplomat Masato Kanda commented that Japan would take appropriate actions on FX markets if needed.

According to Kanda; "Recent currency moves are rapid. The yen has weakened by nearly 10 yen over the period of one month or so, such a rapid move is not good for the economy."

Kanda added; "We are not targeting specific currency levels, but we are comprehensively taking various factors into account, such as that how rapid the moves are and how far away they deviate from fundamentals."

There will also be further speculation that currency weakness will also spark an early Bank of Japan move to tighten monetary policy.

According to MUFG; “So there’s a reasonably high probability of a 10bp hike in April and if the yen extends further weaker we should see market conviction increase further too. With USD/JPY now more or less in intervention territory, a March hike is more feasible.”

It added; “This is political too and the government certainly will not want to be seen to be doing nothing given its unpopularity due to the cost of living crisis. US developments as we saw yesterday take precedence but at higher USD/JPY levels, the threat of intervention and speculation on a March hike should limit yen selling.”

ING noted; “Because this is a dollar rather than a yen-led move, the consensus view is probably that Japanese authorities will not be able to justify any FX intervention. We are not so sure and suspect the US Treasury would again accept Japanese intervention to sell USD/JPY should it make a quick move to 152.”

The bank added; “At just 7.45%, one week USD/JPY implied volatility seems too low in that intervention cannot completely be ruled out.”

According to HSBC; “The rather modest drop in USD-JPY overnight suggests the effectiveness of verbal intervention is low, perhaps because there is still some breathing room before USD-JPY reaches the previous high close to 152.”

The bank noted; “Japanese authorities last intervened in September and October 2022, spending around USD60bn to defend the currency.”

The latest UK consumer prices inflation rate held at 4.0% compared with expectations of a small increase to 4.1%.

The core rate also held at 5.1% compared with market expectations of a net increase to 5.2%.

The data overall triggered a net increase in market expectations that the Bank of England could sanction a cut in interest rates during the second quarter of this year.

In testimony to the Economic Affairs Committee in the House of Lords, BoE Governor Bailey commented on the data; "That's good news, as far as I can tell."

He added; "I think it leaves us broadly where we thought we were going to be. But that's obviously encouraging relative to where we could have been."

Bailey, however, also considered that services inflation was still too high to be consistent with the BoE's 2% target and clearer evidence that wage growth was receding was needed before cutting interest rates.

Bailey also adopted a positive outlook on the economic outlook and played down the impact if the UK did register a technical recession for the second half of 2023.

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TAGS: Pound Yen Forecasts