GBP/JPY trades lower as UK-Japan interest rate expectations converge

• GBP/JPY moderates on expected interest rate convergence between the United Kingdom and Japan.
• In the UK, falling inflation is expected to lead to lower interest rates.
• In Japan, rising inflation is expected to lead to higher interest rates.

The pair GBP/JPY fell and is trading just above 191,000 as expectations of interest rate convergence between the UK and Japan reduce the advantage for investors of holding the British Pound (GBP) against the Japanese Yen (JPY), leading to that weighs on the exchange rate.

Easing inflation expectations in the UK have led investors to speculate that the Bank of England (BoE) will cut interest rates in June. This has weakened the pound, as lower interest rates tend to reduce foreign capital inflows.

By contrast, in Japan, the Bank of Japan raised interest rates from an extraordinarily low level of negative 0.1% at the bank's March meeting. Many investors speculated whether this was a one-off hike or the start of a cycle of rate hikes that could strengthen the Yen in the long term.

In a recent interview with the Asahi Shimbun, Bank of Japan Governor Ueda appeared to suggest that further interest rate hikes could be coming due to accelerating inflation.

Ueda said the positive results of Shunto's spring wage negotiations will be reflected in wages over the summer and, later, in rising consumer prices.

“Given the outcome of the annual wage negotiations to date, the inflation trend is likely to gradually accelerate,” Ueda said.

Inflation cools in the UK

In the United Kingdom, the latest survey by the Decision Makers Panel (DMP) of the Bank of England (BoE), corresponding to the month of February, shows that the majority of companies foresee a cooling in sales prices and inflation salary for the next year.

According to the survey, sales price expectations slowed to 4.1% from 4.3%, the lowest figure in more than two years. Wage growth expectations softened to 4.9% on a three-month moving average, from 5.2% in February.

Bank of England Governor Andrew Bailey recently stated that market expectations of two or three rate cuts this year are “reasonable”, further increasing speculation that the BoE will pull the trigger and cut rates in June.

Soft March services PMI data, released on Thursday, weighed on the UK's economic outlook, adding to the case for the BoE to cut interest rates.

The UK services PMI fell to 53.1, below expectations and the previous reading of 53.4.

However, not all the UK data was negative. A recent report from the UK's largest building society, Nationwide, showed the first rise in house prices since January 2023, according to The Guardian.

This comes after BoE lending data showed a surprising rise in mortgage approvals, which in February reached their highest level since September 2022.