The British Pound is gaining strength against the Japanese Yen, as Japan’s weak Trade Balance data puts pressure on the Yen. This situation comes as Japan prepares for its upper-house election on July 20, which may influence its fiscal and economic policies. The GBP/JPY pair is steady during American trading hours, hovering around its intraday high of 199.56. Currently, it’s trading around 199.30, recovering from earlier losses and staying in a tight trading range for more than a week.

Japan’s Trade Report Misses Expectations

In June, Japan’s trade report shows a surplus of ¥153.1 billion, falling short of the expected ¥353.9 billion. Exports dropped by 0.5% year-over-year, largely due to a significant 26.7% decline in car shipments to the US amid tariffs, while imports increased by 0.2%. The Pound benefits from mixed economic data in the UK, including an Unemployment Rate of 4.7% and Average Earnings Excluding Bonus at 5.0% year-over-year. Inflation surprised by increasing to 3.6% in June, surpassing the Bank of England’s target. Japan’s upcoming National CPI data might provide crucial insights into inflation trends and could influence the Bank of Japan’s future policy decisions. Although recent core inflation remains above the BoJ’s target, the bank is cautious due to various external and domestic issues. The key factor driving this currency pair is the notable difference in monetary policies. With the GBP/JPY trading close to 200.50, a level not seen since 2008, the divergence between the hawkish United Kingdom and the dovish Japan supports the Pound’s strength. Political uncertainty from the upcoming election may add additional pressure on the Yen.

Japanese Monetary Policy’s Impact on Yen

The Bank of Japan has maintained its cautious approach, keeping its policy rate between 0% and 0.1% and indicating no immediate plans for aggressive tightening. This suggests that sustained support for the Yen from its monetary officials is unlikely, potentially leading to further depreciation. In contrast, the United Kingdom’s outlook is more complex. Despite strong wage growth, the latest CPI data for May shows inflation has fallen to the central bank’s 2% target for the first time in nearly three years. This could lead policymakers to consider interest rate cuts later this year, which might limit the Pound’s upside potential. We advise caution due to the looming risk of currency market intervention by Japanese authorities. Data from the Ministry of Finance reveals that Japan spent a record ¥9.79 trillion on intervention in April and May 2024 to support its currency. A swift move significantly above the 200 level could trigger a similar official response. Derivative positioning data indicates that speculative traders continue to hold large short positions against the Japanese Yen. This crowded trade makes the Yen vulnerable to a sharp rally if market sentiment shifts, as traders would be forced to cover their bearish bets. We see this positioning as a major risk for anyone maintaining long exposure in this currency pair. Create your live VT Markets account and start trading now.

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