GBP/JPY trades lower as UK-Japan interest rate expectations converge

GBP/JPY fades as UK-Japan interest rates are expected to converge.
In the UK, falling inflation is expected to lead to lower interest rates.
In Japan rising inflation is increasingly expected to lead to higher interest rates.

Joaquin Monfort FXStreet

GBP/JPY trades a tenth of a percent lower on Friday, at just above 191.000, as converging UK-Japan interest rate expectations reduce the advantage for investors of holding the Pound Sterling (GBP) over the Japanese Yen (JPY), weighing on the exchange rate.

Easing inflation expectations in the UK have led investors to speculate that the Bank of England (BoE) will cut interest rates in June. This has weakened the Pound Sterling since lower interest rates tend to reduce foreign capital inflows.

Conversely in Japan, the Bank of Japan increased interest rates from an extraordinarily low, negative 0.1% level, at the bank’s March meeting. The move had many investors speculating as to whether the increase was a one-off or the start of a cycle of rate hikes that could strengthen the Yen over the longer run.

In a recent interview with the Asahi Shimbun, Bank of Japan (BoJ) Governor Ueda seemed to suggest more interest rate hikes could be down the road given accelerating inflation.

Ueda said the positive results of the Shunto spring wage negotiations will be reflected in wages through the summer, and then reflected in higher consumer prices later in the year.

"Given annual wage talks outcome so far, trend inflation is likely to gradually accelerate," said Ueda.

Survey shows UK inflation cooling

In the UK meanwhile, the latest Bank of England (BoE) Decision Maker Panel (DMP) survey for February showed that most firms see selling prices and wage inflation cooling over the next year.

According to the DMP survey, selling price expectations decelerated to 4.1% from 4.3%, the lowest reading in over two years. Wage growth expectations softened to 4.9% on a three-month moving average basis from 5.2% in February.

Bank of England Governor Andrew Bailey recently said that market expectations for two or three rate cuts this year are “reasonable”, further increasing speculation the BoE will pull the trigger and cut rates in June.

Soft Services PMI data for March, released on Thursday, impacted the economic outlook for the UK, adding to the reasons for the BoE to cut interest rates.

The UK Services PMI fell to 53.1, missing expectations and the prior reading of 53.4.

Nevertheless, not all UK data was negative. A recent report by the UK’s largest building society Nationwide showed the first rise in house prices since January 2023, according to the Guardian.

This comes after BoE lending data showed a surprise rise in Mortgage Approvals rising to their highest level since September 2022 in February.

Author

Joaquin Monfort

FXStreet

Joaquin Monfort is a financial writer and analyst with over 10 years experience writing about financial markets and alt data. He holds a degree in Anthropology from London University and a Diploma in Technical analysis.

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