With the Pound trending near multi-year lows against the Yen, the latest indicators of UK economic activity are foreshadowing a prolonged period of headwinds for the nation as it contends with internal and external developments that are weighing on the outlook. Between reduced economic momentum, deflationary pressures both domestically and from abroad, and a weak trade environment, there are few areas for optimism in relation to the Pound. Considering the pessimistic view towards economic activity ahead, the Pound has reacted to the more dovish bias of the Central Bank and data, falling towards new multi-year lows against the Yen. Although recently announced fiscal stimulus measures along with expanded asset purchases were expected to weaken the Yen, no such conditions have materialized, adding to the risk of further losses in the GBPJPY pair over the medium-term.
Diminished Prospects
Although received with much fanfare, the UK’s decision to leave the European Union has already had severe consequences for the economy. For one, construction and manufacturing activity have slid lower, heightening the risks of a technical recession over the coming quarters, especially if business investment remains weak. With no certainty in the path forward and many questions pertaining to the particulars of the exit still up in the air, the economic climate is likely to reflect worsening sentiment from individuals and businesses. The limbo created by “Brexit†is a risk that will not dissipate over the near-term, adding to the potential for further losses in the Pound as investors seek an exit from the considerable uncertainty facing the outlook. Furthermore, it has heightened the probability of additional interest rate cuts from the Bank of England in upcoming meetings.
Aside from the obvious collapse in certain economic indicators including services sector fundamentals, the UK is facing potentially disastrous consequences from deflation. While Japan has been mired in deflation off and on for decades now, the impact on economic activity, specifically consumer spending is worrisome. Although UK inflation has experienced a recent pickup, the question remains as to whether the improvement in conditions will last, or is merely just transitory. One development that will spur inflation near-term is the significant losses in the Pound which will make imported goods significantly more expensive, adding to upside pressure in consumer prices. However, this boost will just be temporary, with stronger consumption necessary to see a truly sustainable pickup in inflation. Hurting the GBPJPY’s prospects are not just internal UK developments, but the abundant policy failures of Abenomics.
