FX Daily: Trive Bullish on GBP/JPY
The GBP continue supported by the BoE’s gradual rate cuts and optimistic economic outlook. Higher UK yields and stronger GDP growth forecasts make GBP attractive, particularly against low-yield currencies. Meanwhile, JPY faces bearish pressures due to BoJ’s dovish stance and Japan’s political uncertainty, with no major policy changes expected soon. Rising U.S. yields further weigh on the yen.
JPY: Under pressures but careful with potential verbal intervention
The JPY faces bearish pressures due to ongoing domestic political uncertainty and a cautious approach from the BoJ. Following the recent indecisive Lower House elections, the Liberal Democratic Party (LDP) is working to form a coalition, with talks ongoing with the Democratic Party for the People (DPP). DPP leader Yuichiro Tamaki has voiced that the BoJ should hold off on any policy adjustments until at least the spring wage negotiations, reinforcing a dovish outlook. While Tamaki’s stance is well-known and doesn’t notably shift market sentiment, his influence highlights the BoJ’s restrained position. Japan’s rates market already factors in a delay in rate hikes, with no significant policy adjustments expected until after wage discussions.
The recent victory of President Trump has added downward pressure on the JPY, which has already weakened in response. Japanese policymakers have voiced concern over excessive FX movements, especially as USD/JPY edges toward critical technical levels near 155. While intervention remains unlikely for now, any rapid move above 158 could trigger more urgent verbal interventions or even potential action from the BoJ. Governor Ueda has cautioned that further yen weakness could reintroduce inflationary pressures, aligning with the BoJ’s goal of inflation control. Meanwhile, Japan’s latest wage data, though slightly below expectations, points to a steady upward trend, further complicating the BoJ’s decisions. Current market consensus indicates that the next rate hike, if any, is likely in early 2024.
In the near term, upcoming Japanese GDP data will play a critical role in the BoJ’s outlook, especially as the yen’s depreciation intensifies. With the BoJ’s GDP growth forecast for FY24 at 0.6%, numbers exceeding this target could bolster the case for rate hikes. Yet, the broader political landscape adds uncertainty, as the LDP and Komeito coalition, potentially relying on DPP support, may struggle to implement decisive policies. This domestic ambiguity, paired with rising U.S. Treasury yields and expectations for higher U.S. fiscal spending under Trump, increases downside risks for the yen. Thus, barring any significant improvement in Japan’s growth outlook, the JPY appears vulnerable, particularly with limited room for BoJ tightening in the near term.
GBP: Gradual cut support GBP
The GBP outlook is increasingly bullish, supported by the Bank of England's (BoE) gradual approach to rate cuts and more positive economic projections for the UK. Unlike the ECB and the Fed, which are accelerating rate cuts, the BoE has signaled a more cautious, measured pace, cutting rates by 25bps to 4.75% while indicating that future cuts will be gradual. This approach provides a more favorable environment for the pound, particularly as UK yields are expected to remain relatively higher than those in the Eurozone, making the GBP an attractive carry currency in the G10.
The BoE's updated economic projections have also been more optimistic, raising GDP growth forecasts for next year and reducing the unemployment rate outlook, while inflation projections have been modestly revised upwards. These improvements suggest a more resilient UK economy, particularly when compared to the eurozone, which is likely to be hit harder by potential U.S. trade tariffs under a new Republican administration.
In particular, the UK's economy, with its larger share of services exports, is better positioned to withstand such disruptions. Additionally, the BoE's cautious stance on rate cuts further supports GBP strength, especially relative to the ECB’s more aggressive easing measures. While the potential for U.S. tariffs could cap GBP/USD upside beyond the 1.30000 level, the combination of a resilient UK economy and a more gradual BoE approach positions the pound for continued strength, especially against low-yielding currencies like the euro, yen, and Swiss franc. Looking ahead into next week, focus will be on the latest GDP and labor market data out of the UK.
GBP/JPY 4H Chart
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