GBP/JPY falls as weak UK GDP data weigh on the Pound
- GBP/JPY weakens as softer UK GDP and production data weigh on the Pound.
- Rising Oil prices amid the US-Iran war raise global inflation risks.
- Japan’s Finance Minister says the government will take all possible measures in the FX market as Yen weakness persists.
The British Pound (GBP) weakens against the Japanese Yen (JPY) on Friday as Sterling comes under broad pressure following a batch of weaker-than-expected UK economic data. At the time of writing, GBP/JPY is trading around 211.50, retracing all the gains recorded earlier this week.
Data released by the UK’s Office for National Statistics (ONS) showed that the economy lost momentum at the start of the year. UK Gross Domestic Product (GDP) was flat on a monthly basis in January, missing market expectations for a 0.1% increase and slowing from the 0.2% growth recorded in December.
The production sector also showed mixed momentum at the start of the year. Industrial Production declined 0.1% MoM in January, missing expectations for a 0.2% increase after a -0.9% contraction in December. Meanwhile, Manufacturing Production rose 0.1% MoM, but still fell short of the 0.2% forecast after falling -0.5% in the previous month.
The batch of softer UK data reinforced concerns about slowing economic momentum in the UK. At the same time, the ongoing US–Iran war is adding to global inflation risks as Oil prices surge amid severe supply disruptions through the Strait of Hormuz.
This combination of weaker growth and rising energy prices complicates the Bank of England’s (BoE) easing path, with markets scaling back rate-cut bets and now increasingly pricing in the possibility of a rate hike by year-end.
In Japan, the situation is particularly challenging given the country’s heavy reliance on imported energy, with a large share of its Oil supply sourced from the Middle East. A sustained rise in crude prices could weigh on Japan’s economic growth and trade balance. In the meantime, higher energy costs may keep inflation pressures elevated, keeping the Bank of Japan (BoJ) on a tightening path.
Meanwhile, persistent Yen weakness against the US Dollar (USD) remains a key concern, with USD/JPY hovering near levels that previously prompted official intervention from Japanese authorities.
Japan’s Finance Minister Satsuki Katayama said on Friday that Tokyo is in close contact with US authorities regarding foreign exchange developments and warned that the government will take all possible measures in the FX market, noting that rising Oil prices could significantly impact households and daily life.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.