With the BoE holding rates last week, GBP strength is expected to persist, further supported by improving global risk sentiment. In contrast, BoJ Governor Ueda remains cautious about a potential October hike, reiterating that financial market uncertainty persists, so there's no urgency to raise rates. This puts pressure on JPY, potentially reigniting global interest in carry trades.


GBP: Best in the G10 Currencies

As anticipated, the recent BoE decision to maintain interest rates reflects a cautious stance on monetary policy amid ongoing inflationary pressures, which diminish the likelihood of aggressive cuts in the near future. The market now forecasts a gradual easing cycle, with only one potential 25 basis point cut expected later this year. Recent economic data supports this outlook: the unemployment rate has decreased, and the RICS housing market survey indicates significant improvement, particularly in new buyer inquiries, pointing to a resilient housing market. August retail sales exceeded expectations, enhancing the outlook for consumer spending, although concerns about consumer confidence persist, especially with potential fiscal austerity measures in the upcoming UK budget.

 The GBP has shown resilience, benefiting from the relative hawkishness of the BoE compared to other central banks that have adopted dovish stances. This advantage has allowed the GBP to maintain strength and attract inflows into UK assets, particularly if global conditions, like the US avoiding recession, remain favorable. However, risks remain. The market has adjusted its easing expectations for the BoE, with some of these adjustments already reflected in the GBP’s value, making it vulnerable to profit-taking if upcoming data disappoints. Additionally, fiscal concerns stemming from the Labour Party's plans could undermine any positive growth momentum.

In summary, while the GBP is positioned for potential short-term gains due to supportive economic indicators and a cautious BoE, it must navigate external market dynamics and domestic fiscal challenges carefully. Although the UK Flash PMI released yesterday shows disappointment, but from a policy standpoint, the PMI release is unlikely to significantly affect market pricing for the November meeting, as the MPC is more focused on services inflation and real wage trends.

JPY: No hike in near term

The outlook for the JPY appears bearish, driven by the recent decisions from the BoJ and comments from Governor Ueda. The BoJ maintained the short-term policy rate at 0.25%, emphasizing a moderate recovery in Japan's economy, although weaknesses persist in exports and industrial output. Recent inflation data showed August's rate at only 1.1% year-on-year, below expectations, indicating diminishing inflationary pressures. Ueda noted the increasing impact of exchange rate volatility on domestic prices and sidestepped direct commentary on a potential rate hike in October, which has contributed to the yen's weakness. He emphasized that markets remain "unstable," reiterating concerns about the timing of future rate increases, which creates a favorable backdrop for potential carry trades.

Looking ahead, several key events may influence market sentiment toward the yen. On September 27, Japan's ruling Liberal Democratic Party (LDP) will hold a leadership election, as current Prime Minister Kishida steps down due to party scandals and declining approval ratings. This election is expected to be competitive, with multiple candidates advocating for gradual rate hikes. However, if Abe's protégé, Sanae Takaichi, wins, it could lead to a dovish reaction given her previous opposition to policy normalization. Additionally, the Tokyo Consumer Price Index will be released on the same day. While no significant surprises are expected, this data will be closely monitored following Ueda's comments on reduced risks of inflation overshooting. Overall, barring any positive surprise from domestic developments, the yen could continue to face downward pressure in near term, given the recent dovish message from Ueda, as well as if economic conditions fail to align with the BoJ's expectations.

 GBP/JPY 4H Chart

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