Market Data 
- GBP/JPY rises steadily as market mood brightens, reducing flows to the safe-haven Yen.
- Positive lending data in the UK shows credit remains ample.
- BRC Shop Price Index shows disinflation in the UK but not enough to prompt BoE into action, say BBH analysts.
GBP/JPY trades over a third of a percentage point higher at just above 197 on Tuesday, drifting up after the steep correction of the previous day which saw the pair fall from a peak of 200 to a low of the day in the 193s.
The sudden one-day decline was put down to the Japanese authorities intervening in Forex markets to prop up the depreciating Japanese Yen (JPY).
Yet Japan’s top currency diplomat, Masato Kanda, refused to confirm this was the case on Tuesday morning, saying simply that the Ministry of Finance will release figures on currency intervention at the end of May.
He also repeated his warnings about the risks of an excessive weakening of the Japanese Yen (JPY), adding “Excessive FX moves could impact on daily lives,” and, we “Need to take appropriate actions on FX.”
GBP/JPY floats higher on “mean reversion” and buoyant market sentiment
GBP/JPY’s bounce on tuesday seems more due to a “mean reversion” effect than anything driven by any macro-economic data releases, and the bounce in GBP/JPY echoes similar rebounds in most Yen pairs.
As a safe-haven currency, JPY tends to weaken when market sentiment is upbeat and on Tuesday the market mood was overall positive, buoyed by the recent run of tech earnings, positive GDP releases in Europe and overall easing geopolitical concerns.
The continued interest rate differential between the UK and Japan creates an overall bullish backdrop for the GBP/JPY.
The BoE is in no rush to cut interest rates with services inflation still rampant in the UK and in Japan the most recent batch of Tokyo CPI showed disinflation in the capital, which makes it even less likely the BoJ will raise super-low interest rates in Japan. As long as investors see more of a return parking in Pounds than Yen, the pair is destined to rise.
Minor data causes minor effects
The release of Japanese housing data during the Asian session on Tuesday appeared to have little noticeable effect on JPY. Housing Starts fell a bigger-than-expected minus 12.8% in March than the negative 7.6% expected but Construction Orders rose 31.4% from minus 11.0% in the previous month. Annualized Housing Starts moderated slightly to 0.76 million.
UK lending data out a few hours later also had little immediate impact on GBP but GBP/JPY did float higher in the hours that followed.
It is possible the UK data reflected an environment of fairly ample lending and loose credit conditions which might make it less likely that the Bank of England (BoE) will rush to cut interest rates. Keeping interest rates higher for longer is favorable for the Pound as it attracts capital inflows.
UK Net Lending to Individuals in March came out higher than expected at 1.8 billion (GBP) when 1.7B (GBP) had been expected. The February figure was also revised up from 2.8B (GBP) to 3.0B (GBP), according to data from the BoE.
UK Consumer Credit data out at the same time showed British shoppers borrowing more – a slightly higher 1.577 billion (GBP) in March compared to February’s 1.429B (GBP).
UK Mortgage Approvals also rose slightly higher than expected to 61.325K when 61K had been forecast, and Money Supply (M4) rose by 0.7% in March, which was above the 0.4% forecast and the 0.6% of the previous month.
UK inflation data unlikely to persuade BoE
At the same time a fresh batch of UK inflation data, in the form of the Consortium of British Industry’s (CBI) Shop Price Index, showed disinflationary forces at work in April. This might have been expected to weaken GBP, given lower inflation is more likely to bring forward the time when the BoE could decide to cut interest rates.
“Shop Price annual inflation eased to 0.8% in April, down from 1.3% in March. This is below the three-month average rate of 1.4%…its lowest since December 2021,” said the BRC report.
Additionally, non-food items entered deflationary territory, falling 0.6% in April compared to a 0.2% rise in March and a higher 0.2% three-month average.
Food inflation in the UK decelerated to 3.4% in April, down from 3.7% in March. This was below the three-month average rate of 3.9%. It was the twelfth consecutive deceleration in the food category, according to the report.
Although the BRC data painted a deflationary picture, analysts were quick to dismiss any impact on BoE decision-making from the report.
“While the data is welcome, shop price disinflation is unlikely to convince the BoE to move early with policy rate cuts, as it is more concerned with high and sticky services inflation. The first cut is still seen in August,” remarked analysts at Brown Brothers Harriman.
