GBP/JPY extends rally after UK retail sales and Mann’s comments boost sterling

• GBP/JPY is up more than one percent at the end of a strong week.
• UK retail sales beat expectations and earlier prints, adding fuel to the rally.
• BoJ sets dovish tone at meeting but Japanese inflation data hits 10-month high, capping JPY losses.

GBP/JPY is up more than a percentage point and a quarter on Friday to trade in the 191.80s as it builds on sizeable gains made during the week. The pair is extending its bullish run following major macroeconomic releases and events affecting both currencies.

The British pound (GBP) is broadly firming against the Japanese yen (JPY) after the release of UK retail sales showed shoppers loosened their purse strings in August, data from the Office for National Statistics (ONS) showed on Friday. . Retail sales rose 1.0% in August, accelerating from July’s 0.5% increase and roundly beating expectations of 0.4%.

The data suggests that UK buyers are undeterred by higher borrowing costs and continue to spend lavishly. This is likely to cause upward pressure on prices and keep inflation high. This, in turn, will prevent the Bank of England (BoE) from cutting interest rates. Keeping them at a relatively high level (5.0%) will help the Lira strengthen as higher interest rates increase foreign capital inflows.

Sterling gained a step higher after the BoE board voted eight to one to keep interest rates unchanged at its September meeting. The stance is in contrast to most other central banks, which are cutting interest rates as global inflationary pressures ease. Sterling may have gained a new boost from the words of BoE policymaker Catherine Mann, who said of policy on Friday that “it’s better to stay tight longer”.

GBP/JPY’s gains may be limited, however, after Japan’s inflation data showed a pick-up in consumer prices.

Japan’s national consumer price index (CPI) rose 3.0 percent from a year earlier in August, according to data from the Statistics Bureau of Japan (SBJ) released overnight. That was higher than July’s 2.8% and was a ten-month high for the metric.

National CPI excluding food, energy, meanwhile, rose 2.0% from 1.9% previously, and national CPI excluding fresh food rose 2.8% in August, in line with expectations, but higher than July’s 2.7%. The data could keep hopes alive that the Bank of Japan (BoJ) will normalize policy by raising interest rates from their relatively low level (0.25%). With such a move, in turn, helping to strengthen the JPY.

The BoJ wrapped up its September policy meeting on Friday, and while it left interest rates unchanged – as expected – and BoJ Governor Kazuo Ueda struck a cautious tone, citing “elevated uncertainties around Japan’s economic activity and prices”, higher inflation figures published at the same time supported the yen.