Key Moments
- GBP/JPY trades near 211.50, erasing gains from earlier in the week after weaker UK GDP and production figures.
- Flat UK GDP in January and softer industrial and manufacturing output reinforce concerns about slowing economic momentum.
- Rising Oil prices amid the US–Iran war and sustained Yen weakness keep Japanese authorities on alert over FX and inflation risks.
UK Data Hit Sterling, Dragging GBP/JPY Lower
The British Pound (GBP) weakened against the Japanese Yen (JPY) on Friday, with GBP/JPY retreating to around 211.50 as selling pressure intensified following a disappointing run of UK macroeconomic releases. The move erased the cross’s earlier gains from this week, as markets reacted to softer growth and production numbers.
Figures from the UK’s Office for National Statistics (ONS) indicated that the economy stalled at the start of the year. UK Gross Domestic Product (GDP) was unchanged on a monthly basis in January, missing expectations for a 0.1% increase and slowing from the 0.2% expansion recorded in December.
Mixed Performance Across UK Production Sectors
The latest data showed a lack of momentum in the UK production sector. Industrial Production declined 0.1% month-on-month in January, falling short of estimates for a 0.2% rise after a -0.9% contraction in December. Manufacturing Production edged up 0.1% month-on-month, but still undershot the 0.2% forecast following a -0.5% drop in the prior month.
| UK Indicator | Period | Actual | Forecast | Previous |
|---|---|---|---|---|
| Gross Domestic Product (GDP) MoM | January | 0.0% | 0.1% | 0.2% |
| Industrial Production MoM | January | -0.1% | 0.2% | -0.9% |
| Manufacturing Production MoM | January | 0.1% | 0.2% | -0.5% |
This set of weaker figures has amplified worries about a loss of economic momentum in the UK. At the same time, the backdrop of the US–Iran war is intensifying global inflation risks as Oil prices climb sharply amid severe supply disruptions through the Strait of Hormuz.
Oil Shock Complicates Bank of England Policy Outlook
The combination of subdued growth and rising energy costs is making the Bank of England’s (BoE) policy path more complex. Market participants are scaling back expectations for interest rate cuts and are increasingly factoring in the possibility of a rate hike by year-end as inflation risks are reassessed.
Japan Faces Energy Headwinds and Persistent Yen Weakness
Japan faces a particularly challenging environment due to its heavy dependence on imported energy, with a significant portion of its Oil sourced from the Middle East. A sustained rise in crude prices could pressure Japan’s economic growth and trade balance. At the same time, higher energy costs may keep inflation elevated, supporting the case for the Bank of Japan (BoJ) to maintain a tightening bias.
On the currency front, the continuing weakness of the Yen against the US Dollar (USD) remains a central concern. USD/JPY is trading near levels that previously triggered direct intervention by Japanese authorities, keeping market participants attentive to possible policy responses.
Japanese Authorities Signal Readiness for FX Action
Japan’s Finance Minister Satsuki Katayama underscored official unease over recent market moves. She said on Friday that Tokyo is in close contact with US authorities regarding foreign exchange developments and warned that the government will take all possible measures in the FX market, emphasizing that rising Oil prices could significantly impact households and daily life.
Inflation: Key Concepts for Markets
What is inflation?
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
What is the Consumer Price Index (CPI)?
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
How does inflation affect foreign exchange?
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
How does inflation influence the price of Gold?
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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