GBP: treading water

The GBP remains among the G10 FX underperformers MTD, as mixed UK jobs data could not offer the GBP any sort of relief yesterday with GBP rates falling somewhat. Today the focus shifts onto the latest UK GDP and external trade figures for July, although they may not be of a greater help either.

A month ago, UK activity for June surprised massively to the upside (0.5% MoM vs 0.2% expected) thanks to positive base effects stemming from the extra bank holiday, but the ebb & flow in activity from one month to another may have had longer legs.

The economists surveyed by Bloomberg indeed look for a -0.2% MoM contraction in July UK GDP, as other data sets already suggest that poor weather conditions in the month somewhat deterred UK consumers, on top of tighter monetary conditions more broadly speaking.

Ultimately, today’s data is unlikely to change the prospects that the UK economy will likely just continue to stagnate, as per the latest scenario outlined by the BoE in its August MPR and reiterated yesterday by upcoming Deputy Governor Sarah Breeden. Against this not-so-rosy backdrop, the GBP may just muddle through as well, while being possibly more vulnerable to stagflation threats than other FX majors.

JPY: watching the US CPI data

Following BoJ Governor Kazuo Ueda’s hawkish words in the Japanese press over the weekend, investors have continued to increase their bets that the BoJ will end its NIRP sometime in early 2024. The 5Y JGB yield has jumped to its highest level since January 2023, when there was last speculation of a shift in the BoJ’s ultraloose monetary policy stance. This was the time ahead of PM Fumio Kishida nominating Ueda to be BoJ Governor and Ueda affirming he would be sticking to the current monetary policy regime.

The 10Y JGB yield is also clinging to its recent 5bp gain to around 0.70%. While this speculation and higher JGB yields initially helped the JPY, its rally has faded and the currency is now only modestly less weak than it was before Ueda’s remarks. The culprit of this renewed weakness in the JPY is investors positioning for a potential upside surprise in US inflation when CPI data is released later today.

The main driver of the JPY remains UST yields rather than JGB yields given that the latter remain tied down by the BoJ. An upside surprise in US CPI would place further pressure on Japan’s policymakers to verbally intervene in FX markets to support the JPY to potentially be followed by actual intervention.

The BoJ meeting next week will be a big litmus test on this front. What is clear from the recent rhetoric of policymakers is that both MoF and BoJ officials now acknowledge a weak JPY is bringing about more cost-push inflation, which is hurting households, than the desirable demand-pull inflation required to bring about a sustainable end to deflation.

This is a significant shift in rhetoric given that previously officials constantly said the benefits of a weak JPY for the economy more than offset its drawbacks.