The main causes of the decline were weak UK data and risk-off movements in US equity markets.
This was more than the dovish comments from Governor Kuroda of BoJ.
GBP/JPY fell more than 200 pips to 165.00 on Friday after falling from previous highs above167.50 to test support at the March highs. GBP/JPY trades at levels just above this big figure with on-the-day losses of around 1.3%. This would be the pair’s worst single-day drop since March 4, when FX markets experienced a period of extreme risk-off due to the Russo–Ukraine war only one week prior.
Since then, the FX market has shifted to the inflationary effect of the changes and currencies have started trading more as a function central bank policy divergence than risk appetite. GBP/JPY trades at 165.00 more than 9.0% higher than its sub-151.00 March lows. This is mainly due to the yen being absolutely battered over the past few weeks due to the belief that the BoJ would keep its policy settings the same as other central banks (including BoE) in order to combat inflation.
BoJ policy was at the forefront of attention earlier Friday with Governor Hurahiko Kuroda increasing his dovish stance. He stated that 1) inflation is higher than expected in the short-term but still has not shown signs of reaching the BoJ’s 2.0% goal. 2) It remains appropriate to continue the policies of yield curve control and negative interest rates. The comments caused the yen to weaken and GBP/JPY to temporarily rise from below 165.00 to the upper 165.00s.
The pair has fallen since then, due to safe-haven flows from the more risky pound to the yen and selling pressure on US equity markets. While risk-off is one of the reasons GBP/JPY was lower on Thursday (it largely explained the large drops in NZD and AUD as well), Friday’s weak UK data was another factor that weighed heavily on sterling. Analysts agree that the data will undermine the case for BoE tightening over the coming months and will likely justify why BoE policymakers sound more concerned about the economy in recent weeks.
