GBP/JPY extends rally after UK Retail Sales and Mann’s comments boost the Pound

• GBP/JPY rallies by more than a percent at the end of a strong week. 
• UK Retail Sales beat expectations and past prints adding fuel to the rally. 
• BoJ strikes dovish tone at meeting but Japanese inflation data hits ten-month high, limiting JPY losses. 

GBP/JPY rises over one-and-a-quarter percentage points on Friday, to trade in the 191.80s, as it builds on considerable gains made throughout the week. The pair extends its bullish run following major macroeconomic releases and events affecting both currencies. 

The Pound Sterling (GBP) is strengthening overall against the Japanese Yen (JPY), after the release of UK Retail Sales showed shoppers loosening their purse strings in August, data from the Office of National Statistics (ONS) showed on Friday. Retail Sales rose 1.0% MoM in August accelerating the 0.5% rise of July and roundly beating expectations of 0.4%.

The data suggests that shoppers in the UK are unphased by higher borrowing costs and are continuing to spend liberally. This is likely to cause upward pressure on prices and keep inflation elevated. This, in turn, is likely to keep the Bank of England (BoE) from cutting interest rates. By maintaining them at a relatively high level (5.0%) it will help the Pound to strengthen because higher interest rates increase foreign capital inflows. 

The Pound gained a leg up on Thursday after the board of the BoE voted eight to one to keep interest rates unchanged at its September meeting. The stance stands in contrast to most other central banks which are lowering interest rates as global inflationary pressures ebb. Sterling probably gained a further boost from the words of BoE policymaker Catherine Mann, who said about policy on Friday, that “it is better to remain restrictive for longer.”

GBP/JPY upside could be limited, however, after inflation data from Japan showed an uptick in consumer prices.

The National Consumer Price Index (CPI) for Japan rose 3.0% YoY in August,  according to data from the Statistics Bureau of Japan (SBJ) released overnight. This was higher than the 2.8% of July, and represented a ten-month high for the metric.  

National CPI ex Food, Energy, meanwhile, showed a 2.0% YoY rise from 1.9% previously, and National CPI ex Fresh Food a 2.8% YoY rise in August, in line with expectations but higher than the 2.7% of July. The data is likely to keep alive hopes the Bank of Japan (BoJ) will normalize policy by raising interest rates from their relatively low (0.25%) level. With such a move, in turn, helping to strengthen the JPY.   

The BoJ concluded its September policy meeting on Friday, and although it left interest rates unchanged – as widely expected – and BoJ Governor Kazuo Ueda struck a cautious tone, citing “high uncertainties surrounding Japan’s economic activity and prices”, the higher inflation readings released at the same time supported the Yen.