More Pound-Yen Weakness Ahead, Forecasts Natixis

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Strategists at Natixis are positioning for further weakness in the Pound-to-Yen exchange rate, citing a fragile British currency and expectations of continued strength in the Japanese yen.

The GBP/JPY pair, which recently rebounded to 190.6 after falling to 187, is likely to decline further to 185 in the coming months, Natixis analysts said in a research note on Monday.

"The potential for further GBP/JPY appreciation is low," says Nordine Naam, a strategist at Natixis, pointing to sluggish UK economic growth, deteriorating public finances, and expectations of Bank of England rate cuts later this year.

While elevated UK interest rates—currently at 4.50%—have provided some support for sterling, Natixis said the Bank of Japan’s (BOJ) tightening policy would bolster the yen. Japan’s currency has been the strongest performer among G10 peers since the start of the year, helped by rising BOJ interest rates and a decline in U.S. long-term yields.

The bank also highlighted Japan’s improving economic fundamentals, with fourth-quarter GDP growth surpassing expectations at 0.7% and inflation rising to 3.6% in January. Natixis expects further BOJ policy adjustments, with a rate hike potentially coming as early as May.

"The GBP/JPY is expected to trend downward in the coming months," says Naam.

The Yen is outperforming in Thursday's trading session, helped by rising Japanese bond yields.

The 10-year JGB yield is trading at the highest level since November 2009 as investors brace for further interest rate rises at the Bank of Japan.

"The break higher in yields is due to a combination of higher than expected CPI readings as well as increased Bank of Japan tightening expectations," says Dr. Win Thin, Global Head of Markets Strategy at Brown Brothers Harriman.

The next hike is still priced in for September, but the swaps market now sees nearly 60% odds of another hike that would see the policy rate peak near 1.25% vs. 1.0% previously.

"January CPI data tomorrow could reinforce current rate hike expectations and offer JPY additional support," adds Thin.