Pound Sterling falls to one-month low against surging Japanese Yen

• GBP/JPY falls sharply as the Japanese Yen strengthens across the board for a second day.
• Intervention speculation and hawkish Bank of Japan expectations support the Yen.
• Upbeat UK services data offers little relief as the cross approaches the post-intervention low.

GBP/JPY extends its steep decline on Thursday as the Japanese Yen (JPY) strengthens sharply across the board for the second consecutive day. The cross fell 1.13% on Wednesday and is down around 1.60% at the time of writing, trading near 210.60, its lowest level in a month. Sellers are now eyeing the post-July coordinated intervention low of 209.58.

The Yen’s rally gathered pace after USD/JPY briefly climbed above the psychologically important 160 mark, raising speculation over another round of intervention or a rate check. Japan’s top currency diplomat Atsushi Mimura said on Thursday that authorities “continue to stand ready on forex.” Mimura declined to comment when asked whether officials had conducted a rate check and added that he was “neither at ease nor satisfied with the current forex market.”

Expectations that the Bank of Japan (BoJ) could adopt a more hawkish monetary policy stance also improve sentiment toward the Yen, particularly following comments from BoJ board member Hajime Takata. Takata called on Wednesday for “a more nimble approach with rate hikes” and said the central bank should consider “a broad range of options, not just a 0.25% rate hike each time.” Traders have now fully priced in a rate hike at the BoJ’s September 16-17 meeting.

Strategists at Societe General argues that “with the BoJ potentially stepping up the cadence of tightening (not the increments), and bond repatriation flows being stepped up ahead of FY end (recuring seasonal pattern), there is a case to believe that the Yen may be just about to turn a corner.” However, they caution that “conviction will partly depend on what the Fed does next, and whether bond spreads can back up the move in spot.”

The Pound Sterling (GBP), meanwhile, shows little reaction to encouraging UK business activity data. The final S&P Global UK Services Purchasing Managers Index (PMI) rose to 52.5 in August from 52.1 in July, marking the strongest expansion since April, although the reading was revised down from the preliminary estimate of 52.8. The Composite PMI also climbed to 52.5 from 52.2.

Tim Moore, Economics Director at S&P Global Market Intelligence, said: “Service providers are increasingly optimistic about the year-ahead business outlook, with confidence levels now close to those seen just prior to the Middle East conflict. However, business activity growth projections were still subdued in comparison to long-run trends amid lingering worries about inflationary pressures and geopolitical tensions.”