GBP/JPY edges higher on strong UK data, softer Japan CPI caps Yen

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GBP/JPY advances on Friday, as stronger-than-expected UK economic data boosts the British Pound (GBP), while softer inflation figures from Japan weigh on the Japanese Yen (JPY). At the time of writing, the cross is hovering around 209.23, remaining confined within a little over one-week range.

GBP/JPY edges higher as upbeat UK Retail Sales and PMI data lift the Pound.
Softer Japan inflation dampens expectations of near-term BoJ tightening.
GBP/JPY remains largely range-bound between 207.50 and 209.50.

UK Retail Sales surged 1.8% MoM in January, far exceeding expectations for a modest 0.2% rise and accelerating sharply from December’s 0.4% increase. On an annual basis, Retail Sales rose 4.5% from a downwardly revised 1.9% (previously 2.5%), comfortably above the 2.8% forecast.

Retail Sales ex-fuel increased 2% MoM in January, marking a sharp pickup from the prior month’s 0.3% gain. On an annual basis, sales climbed 5.5%, up from 2.5% in December.

Preliminary Purchasing Managers Index (PMI) data from S&P Global also surprised to the upside. The Composite PMI climbed to 53.9, marking a 22-month high, while the Manufacturing PMI rose to 52, its strongest reading in 18 months. The Services PMI remained firmly in expansion territory at 53.9.

The stronger Retail Sales and PMI figures contrast with softer UK employment and inflation data released earlier this week and could influence the Bank of England’s (BoE) monetary policy outlook, as firmer growth data may reduce the urgency for aggressive easing.

Markets currently expect the BoE to resume rate cuts as soon as its March meeting, with nearly two additional reductions priced in later this year.

In Japan, inflation data released earlier in the day showed price pressures easing at the start of the year. The National Consumer Price Index (CPI) rose 1.5% YoY in January, slowing from 2.1% in December.

Core measures also softened, with CPI excluding food and energy easing to 2.6% from 2.9%, while CPI excluding fresh food slowed to 2% from 2.4%.

The softer inflation readings may temper expectations of near-term tightening by the Bank of Japan (BoJ), adding pressure on the Yen as markets reassess the pace of further rate normalization.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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