British Pound struggles to extend recovery against Japanese Yen

The British Pound (GBP) faces roadblocks in extending the early recovery against the Japanese Yen (JPY) above 216.33 during the European trading session on Friday. The cross rebounded strongly at THE open as profit-booking hit in the Japanese Yen (JPY), following a juggernaut decline the previous day.

The pair dived almost 1.7% on Thursday after Japan's Ministry of Finance (MoF) intervened to support the domestic currency.

The cross struggles to extend the upside after a strong opening as the JPY regains ground, following the release of the stronger-than-expected Tokyo Consumer Price Index (CPI) data for July and the Bank of Japan (BoJ) maintaining a hawkish rhetoric on the interest rate outlook after leaving them unchanged at 1%.

Tokyo’s CPI ex. Fresh Food arrived higher at 1.9% Year-on-year (YoY). The CPI growth rate was faster than the 1.7% estimate and the previous reading of 1.6%.

In spite of Japan’s intervention, higher Tokyo CPI growth, and BoJ’s hawkish monetary policy stance, market experts doubt that the JPY’s strength would be long-lasting.

Analysts at Commerzbank note that “the stage was set” ahead of Japan’s latest policy decisions, as “yesterday’s intervention in the foreign exchange market by the Ministry of Finance (MoF) clearly showed that the government is concerned about the Japanese yen being too weak.” They add that “support from the US Treasury Department also indicated that the move would likely be met with a favorable response internationally.”

Against this backdrop, Commerzbank highlights that “this morning’s inflation data for the Greater Tokyo Area further show that inflation is now slowly stabilizing at 2%, and the momentum of recent months points more toward an upside risk.” Even so, the Bank of Japan “stuck to its course this morning and acted (too) cautiously.” According to the bank, “the key interest rate remained unchanged, but this was to be expected. There were also slight hints toward a more hawkish monetary policy,” with the economic outlook at least mentioning “some upside risks regarding inflation.”

“All in all, however, it’s safe to say that this is unlikely to be enough for the market to change its expectations regarding the Bank of Japan,” Commerzbank argues. In their view, “all of this is likely to be insufficient to prevent the JPY from trading weaker again in the coming days and weeks.” The recent pattern suggests that “while the Ministry of Finance (MoF) is willing to intervene in the foreign exchange market, the exchange rate that triggers such intervention appears to be shifting higher and higher toward a weaker JPY,” leaving “little reason to believe that this will change in the coming weeks.”

Meanwhile, the British currency trades broadly lower as traders trim Bank of England (BoE) interest rate expectations.

Financial markets pare hawkish BoE bets as remarks from Governor Andrew Bailey in his press conference signaled that inflationary pressures didn't appear much concerning. "Encouraging that CPI is below where we thought it would be," Bailey said.

BoE repricing gathers pace as Deutsche Bank downplays hike risks

Analysts at Deutsche Bank stress that the BoE was not, in their words, “edging towards a rate hike,” despite the split vote on the MPC. They note that markets “dialed back expectations for BoE hikes in response,” with the implied probability of a September move dropping sharply, as “pricing of a September hike [fell] from 60% to 30% and 31bps of hikes priced by year-end (-11.4bps on the day).”