The Japanese yen is facing increasing pressure from domestic political uncertainty following Japanese Prime Minister Fumio Kishida’s decision to step down. This decision could impact the Bank of Japan’s plans to gradually raise interest rates. However, investors remain confident that the overall economic situation in Japan is improving, which could prompt the Bank of Japan to raise interest rates again later this year. With geopolitical risks still present, this is expected to limit any significant decline in the yen’s value, continuing to support the GBP/JPY pair.
Market participants are currently looking ahead to the release of the UK’s preliminary PMIs as an opportunity for short-term trades, while attention will later turn to the Japanese CPI due on Friday. Bank of England Governor Andrew Bailey’s remarks at the Jackson Hole symposium on Friday are also expected to increase volatility and provide positive momentum for the GBP/JPY pair.
The GBPJPY pair regained its positive momentum on Thursday, supported by several factors. The positive risk tone and uncertainty around a BoJ rate hike are undermining the safe-haven Japanese yen. On the other hand, the prospect of a BoE rate cut in September is supporting the British pound, which is strengthening.
The GBPJPY pair attracted some dip buying near the 189.65-189.60 area on Thursday, and rose to a daily high during the US session. Prices are currently trading at 191.50, within a familiar range that has been maintained over the past week, below the important 200-day simple moving average.
The British pound is supported by the prospect of another interest rate cut by the BoE after last week’s UK inflation and labor market data, which pointed to a resilient economy. This data, along with upbeat UK GDP data, is fueling speculation that the BoE may hold rates steady at its September meeting.
EURJPY holds above 162.00 amid Japanese economic data
EURJPY continues to hold above 162.00 during the American session on Thursday, thanks to the impact of Japanese economic factors that create a favorable environment for the pair. The latest data reveals a large trade deficit for Japan at 621.84 billion yen, after the goods trade balance was positive in June, with a notable increase in imports that exceeded expectations.
Later in the day, traders will focus on the preliminary purchasing managers’ index (PMI) data for August from Germany and the Eurozone, which may provide additional signals on the health of the European economy. On the Japanese side, all eyes will be on the national consumer price index (CPI) for July, in addition to the speech of Bank of Japan (BoJ) Governor Kazuo Ueda.
EURJPY is showing a significant bearish trend, as it is currently trading below the 100-period exponential moving average (EMA), which forms resistance at 162.70. The Relative Strength Index (RSI) is below the 50 level at 48.00, suggesting a possible downtrend in the near term.
Meanwhile, Japanese markets saw a notable recovery as the yen weakened ahead of Bank of Japan Governor Kazuo Ueda’s testimony to parliament. Activity in Japan’s manufacturing sector fell slightly in August, but by a smaller amount than in previous months, while the services sector expanded, according to a business survey.
The Nikkei average rose 0.68% to 38,211.01, while the broader Topix index was flat at 2,671.40. Among the big gainers, Sumitomo Dainippon Pharma surged 6.7% to a 52-week high. The Bank of Japan Flash Manufacturing Purchasing Managers’ Index (PMI) rose to 49.5 in August from 49.1 in July, while the services business activity index rose to 54.0 from 53.7 in July. The composite activity index also rose to 53.0 in August from 52.5 in July.
Japan steps up rate hikes as trade balance shrinks, yen strengthens
In a move aimed at achieving sustainable economic stability, the Bank of Japan expects a strong economic recovery to help it reach its 2% inflation target on a sustained basis. This outlook could justify further rate hikes, following the rate hike implemented last month as part of the bank’s strategy to phase out years of aggressive monetary stimulus.
Japan’s merchandise trade balance narrowed markedly, recording a deficit of 621.84 billion yen in July, a sharp turnaround from a surplus of 224.0 billion yen in June and in contrast to market expectations of a deficit of 330.7 billion yen. Japan’s imports rose 16.6% year-on-year in July, hitting a 19-month high of 10,241.01 billion yen, compared with a 3.2% increase in June. In contrast, exports rose 10.3% year-on-year to 9,619.17 billion yen, below market expectations of 11.4%.
An economist explained that recent economic reports support the Bank of Japan’s view, which bodes well for further rate hikes. However, he noted that the central bank may be cautious, especially after the recent rate hikes caused a sharp rise in the yen’s value.
In this context, the USDJPY pair witnessed a rise as a result of the yen’s decline after the release of the record trade deficit report. Traders are looking forward to the appearance of Bank of Japan Governor Kazuo Ueda in parliament on Friday to discuss the central bank’s decision to raise interest rates.
The US dollar (USD) also witnessed a slight rise on Thursday thanks to a rebound in Treasury yields, although the increase may be limited. This expectation comes amid the possibility of the Federal Reserve cutting interest rates by 100 basis points in 2024, with analysts’ opinions differing on whether it will reduce them by 25 or 50 basis points at its next meeting in September.
