The GBP/JPY currency pair weakened on Thursday as risk-averse flows boosted the Japanese Yen, despite positive economic data from the United Kingdom. Traders were carefully re-evaluating the prospects following the UK’s most recent Gross Domestic Product (GDP) data. Consequently, GBP/JPY fell 0.5% to 193.70. Market participants are now turning their attention to Japan’s preliminary Q1 GDP report, scheduled for release at 23:50 GMT, which could influence the Bank of Japan’s (BoJ) recent hawkish stance.
This risk-off environment is driving strong demand for traditional safe-haven assets, including the Yen. Consequently, this is creating downward pressure on the GBP/JPY cross. Japan’s April PPI rocketed up 4.0% over a year ago. This wave further confirms BoJ officials’ hawkish comments of late and raises the prospect for further monetary tightening.
UK GDP Data Surpasses Expectations
It has been propelled by a strong economic rebound as GDP grew by 0.7% q/q in the first quarter of this year, above the consensus expectation of 0.6%. This is the quickest rate of expansion in a year and is good news and some cause for hope for the UK economy.
So, on balance, this is good news but the GBP/JPY pair is still under pressure. Traders fear that Japan’s stronger-than-expected GDP number might add to the Bank of Japan’s hawkish resolve. This might accelerate declines for GBP/JPY. The first major potential bull target for these losses is support at 190.00.
“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.” – Shinichi Uchida
Japanese Yen Strengthened by Risk Aversion
The general risk-off sentiment in the markets has been supportive of the Japanese Yen. This has caused investors to run towards safer assets in this time of uncertainty. Today’s environment is one of increased worry about the fragility of the global economy, leading investors to retreat from higher-risk assets.
As demand for safe havens increases, the Japanese Yen sees upward pressure. This announcement has resulted in the GBP/JPY taking a tumble. It has dimmed any good news from the UK’s GDP figures.
Analysts say that this trend might gain momentum if Japan’s first GDP report comes out showing a contraction, as predicted, of 0.1%. Such an outcome would not just blow past high hopes for strong above-trend economic growth, but it might even cement the BoJ’s hawkish broadened tightening.
Market Focus Shifts to Japanese Economic Indicators
Traders are waiting with bated breath for Japan’s first look at GDP. They’re interested in seeing how these figures might impact the Bank of Japan’s forthcoming monetary policy decisions. The market is extremely jittery on any signs that might hint at a change in Japan’s economic future.
Other data points, including Japan’s PPI jump, have already laid the groundwork for shifts in policy direction. The increase in producer prices corroborates Uchida’s statement regarding wage inflation in a tight labor market. All of this hints at persistent inflationary pressures, despite a few months of economic pause.
Traders are looking forward to the GDP report. They are particularly concerned about how well these figures will line up with the recent hawkish turn from the BoJ. An unexpectedly positive report would likely hasten losses for GBP/JPY in short order. Signs of weakness could provide some respite for the EUR/USD.