Pound Gains vs Yen as UK Data Beats, Japan CPI Softens

Key Moments

GBP/JPY trades near 209.23, holding within a 207.50-209.50 range over a little more than one week.
UK January Retail Sales and PMI readings significantly exceed forecasts, supporting the Pound.
Japan’s January CPI and core inflation slow, easing expectations for imminent BoJ tightening and pressuring the Yen.

GBP/JPY Supported by Robust UK Data

GBP/JPY edges higher on Friday as a string of stronger-than-expected UK economic releases underpins the British Pound (GBP), while weaker inflation figures from Japan weigh on the Japanese Yen (JPY). The cross is quoted around 209.23 at the time of writing, continuing to trade within a relatively tight band between 207.50 and 209.50 that has held for a little over a week.

UK Retail Sales and PMI Beat Expectations

Latest UK Retail Sales data show a sharp rebound in consumer spending at the start of the year. Headline Retail Sales climbed 1.8% month-on-month in January, well above expectations for a 0.2% increase and accelerating from a 0.4% gain in December. On a year-on-year basis, Retail Sales grew 4.5%, up from a downwardly revised 1.9% (previously 2.5%) and comfortably above the 2.8% consensus projection.

Excluding fuel, Retail Sales rose 2.0% month-on-month in January, a strong pickup from the prior month’s 0.3% increase. Compared with a year earlier, sales excluding fuel advanced 5.5%, more than doubling December’s 2.5% pace.

Survey data also point to improving momentum. Preliminary Purchasing Managers Index (PMI) figures from S&P Global surprise to the upside, with the Composite PMI rising to 53.9, a 22-month high. The Manufacturing PMI moves up to 52.0, its strongest level in 18 months, while the Services PMI holds firmly in expansion territory at 53.9.

UK Indicator	Latest Reading	Previous	Forecast / Noted Level
Retail Sales MoM (January)	1.8%	0.4%	0.2%
Retail Sales YoY (January)	4.5%	1.9% (revised from 2.5%)	2.8%
Retail Sales ex-fuel MoM (January)	2.0%	0.3%	n/a
Retail Sales ex-fuel YoY (January)	5.5%	2.5%	n/a
Composite PMI (preliminary)	53.9	n/a	n/a
Manufacturing PMI (preliminary)	52.0	n/a	n/a
Services PMI (preliminary)	53.9	n/a	n/a

These upbeat indicators contrast with softer UK labor market and inflation releases published earlier in the week. The firmer growth signals could shape the Bank of England’s (BoE) policy outlook by reducing pressure for rapid or aggressive easing.

Market pricing currently reflects expectations that the BoE could restart interest rate cuts as early as its March meeting, with nearly two further reductions anticipated later in the year.

Japanese Inflation Cools, Weighing on the Yen

In Japan, inflation data published earlier in the day indicate that price pressures eased at the beginning of the year. The National Consumer Price Index (CPI) increased 1.5% year-on-year in January, slowing from 2.1% in December.

Core inflation measures also moderated. CPI excluding fresh food and energy slipped to 2.6% from 2.9%, while CPI excluding fresh food declined to 2.0% from 2.4%.

Japan Inflation Measure	January YoY	December YoY
National CPI	1.5%	2.1%
CPI ex fresh food and energy	2.6%	2.9%
CPI ex fresh food	2.0%	2.4%

The softer inflation readings may curb expectations for imminent tightening by the Bank of Japan (BoJ), prompting investors to reassess the likely speed of any further normalization of interest rates. This reassessment adds pressure on the Yen and provides an additional tailwind for GBP/JPY.

Background: Pound Sterling and Policy Drivers

The Pound Sterling (GBP) is described as the oldest currency in the world (886 AD) and is the official currency of the United Kingdom. It is identified as the fourth most traded unit in the foreign exchange (FX) market, accounting for 12% of all transactions and averaging $630 billion per day, according to 2022 data.

Key GBP currency pairs highlighted include GBP/USD, commonly referred to as “Cable,” which represents 11% of FX turnover, GBP/JPY, known by traders as the “Dragon,” at 3%, and EUR/GBP at 2%. The Pound Sterling is issued by the Bank of England (BoE).

Role of the Bank of England in GBP Valuation

Monetary policy set by the Bank of England is described as the dominant factor influencing the value of the Pound. The BoE’s decisions are guided by its primary objective of “price stability” – maintaining inflation at around 2%. Its main instrument for achieving this target is the adjustment of interest rates.

When inflation runs above target, the BoE aims to contain price pressures by raising interest rates, increasing borrowing costs for households and businesses. This is generally viewed as supportive for GBP, as higher rates can make the UK more attractive to international investors.

If inflation falls too low, signaling slower economic growth, the BoE may consider lowering interest rates to reduce the cost of credit and encourage businesses to borrow and invest in growth-oriented projects.

Economic Data and Trade Balance as GBP Catalysts

Economic data releases serve as gauges of UK economic health and can significantly influence the Pound’s direction. Indicators such as GDP, Manufacturing and Services PMIs, and employment figures can all affect GBP performance.

A robust economic backdrop is characterized as positive for Sterling. Strong activity can both draw more foreign capital into the country and increase the likelihood that the BoE will raise interest rates, providing direct support to the currency. Conversely, weaker data tend to weigh on GBP.

The Trade Balance is also highlighted as an important determinant for the Pound. This metric captures the difference between what a country earns from exports and what it spends on imports over a specified period. If a country produces goods and services that are in high demand abroad, its currency benefits from the additional demand generated by foreign buyers seeking those exports. A positive net Trade Balance is described as supportive for a currency, while a negative balance is seen as a headwind.