GBP/JPY slides as Yen firms on risk aversion with Japan GDP in focus
- GBP/JPY weakens as risk-off flows lift the Japanese Yen despite upbeat UK GDP data.
- UK Q1 GDP beats forecasts, but BoE caution tempers Pound strength.
- Hawkish BoJ remarks and strong Japan PPI raise rate hike expectations ahead of GDP release.
GBP/JPY is under pressure on Thursday as safe-haven demand drives renewed strength in the Japanese Yen (JPY).
Despite stronger-than-expected United Kingdom (UK) GDP data, the British Pound (GBP) is struggling to gain traction amid growing risk aversion, driven by escalating geopolitical tensions, fading optimism around US–China trade negotiations, and divergent central bank signals.
At the time of writing, the pair is down 0.5% on the day at 193.70, with traders turning their focus to Japan’s preliminary Q1 GDP report due at 23:50 GMT, which could reinforce or challenge the Bank of Japan’s (BoJ) recent hawkish shift.
UK GDP surpasses expectations, but BoE warns of potential headwinds
The UK’s Office for National Statistics (ONS) published its preliminary Gross Domestic Product (GDP) data for the first quarter on Thursday, revealing that the economy grew by 0.7% QoQ, beating the 0.6% consensus, registering the fastest pace of growth in a year.
However, despite the upside surprise in first-quarter growth, economists caution that the momentum may not be sustained. The Bank of England (BoE) remains measured in its outlook, maintaining a full-year GDP forecast of just 1.0%, as the economy faces headwinds from elevated interest rates, weaker global trade flows, and tighter fiscal conditions.
BoJ signals shift as inflation data supports hawkish tilt
On Tuesday, BoJ Deputy Governor Shinichi Uchida signaled a potential shift in the central bank’s policy stance, telling parliament that “Japan's underlying inflation and medium- to long-term inflation expectations are likely to temporarily stagnate. But even during that period, wages are expected to continue rising as Japan's job market is very tight.”
He added that companies are expected to pass rising labor and transportation costs to consumers, reinforcing inflationary pressures. These remarks suggest the BoJ is laying the groundwork for further rate hikes if economic conditions continue to align with its projections.
Japan’s April Producer Price Index (PPI), released Wednesday, rose 4.0% YoY, further validating Uchida’s comments and raising the likelihood of additional tightening. Markets are now awaiting Japan’s preliminary GDP figures, with a 0.1% contraction forecast.
Risk-off mood and Japan GDP in focus for GBP/JPY’s next move
Global markets remain in a defensive posture amid lingering uncertainty over US–China trade negotiations and broader geopolitical tensions. This risk-off environment has fueled demand for traditional safe-haven assets like the Japanese Yen, adding pressure to GBP/JPY.
With Japan’s GDP release now in focus, a stronger-than-expected figure could reinforce BoJ hawkishness and accelerate GBP/JPY losses, potentially driving the pair toward support at 190.00. Conversely, a downside surprise may offer short-lived relief for the Pound. Barring a clear BoJ pivot, the near-term bias in GBP/JPY remains tilted to the downside, shaped by risk sentiment and shifting monetary policy dynamics.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Tammy Da Costa, CFTe®
FXStreet
Tammy is an economist and market analyst with a deep passion for financial markets, particularly commodities and geopolitics.
