The pound fell against the yen yesterday following reports of another contraction in manufacturing activity in January. Notably, Japan’s manufacturing PMI data also indicated contraction in the same period, but the level of contraction was much steeper in the UK. This encouraged the market participants to sell the pound. Overall, the GBP/JPY pair fell from a high of 161.70 to a low of 160.05 in the past 24 hours.
The Jibun Bank Flash Japan Manufacturing Purchasing Managers’ Index (PMI) was 48.90 in January, unaltered from the previous month but missing forecasts of 49.40. The reported reading signaled the steepest deterioration in the health of Japan’s manufacturing industry since October 2020. A reading below 50 indicates contraction and vice versa.
The demand scenario remained weak, leading to consistent reductions in fresh orders and output, although rates of decline eased to three-month lows. In accordance with a decline in production levels, firms slashed back input purchases at the quickest rate since April 2014, devoid of the initial pandemic-linked shutdown. Notably, businesses were optimistic about a recovery in 2023 and recorded a robust level of business confidence.
The flash manufacturing output index improved to 47.10 in January from 46.60 in December. Likewise, the flash services business activity index improved to 52.40 in January from 51.10 in the prior month. Overall, the flash composite output index increased to 50.80 in January, signaling a rebound into expansion territory from 49.70 in December.
The S&P Global UK flash manufacturing PMI (purchasing managers’ index) improved to a four-month high of 46.70 in January from 45.30 in December and surpassed forecasts of 45.40.
Likewise, the flash UK manufacturing output index increased to a six-month high of 46.60 in January from 44.40 in the previous month. However, the pace of contraction was the lowest since July 2022.
The S&P Global flash services PMI fell to a two-year low of 48 in January, from 49.90 in the earlier month, which disappointed economists who were expecting only a slight decline in the reading to 49.60.
Overall, the UK flash PMI composite output index dipped to a two-year low of 47.80 in January from 49 in the prior month. Notably, the reading remains below 50 for the sixth month in a row.
The weak client demand paved the way for a continued downturn in fresh work in January. Nevertheless, the aggregate decrease in fresh orders was only a little bit and the softest since August 2022.
In spite of declining output volumes and weak demand, positivity regarding the year-ahead outlook for business activity increased in January and has been robust since May 2022.
The weak economic data from both Japan and the UK is expected to keep the GBP/JPY pair range-bound in the short term.
Technically, the GBP/JPY pair is declining after facing resistance at 161.70. The next support is anticipated only near 156.50. Additionally, the currency pair is trading below its 50-day moving average while the stochastic indicator is in the bearish zone. Therefore, we anticipate the GBP/JPY pair to remain in a downtrend in the short term.
Disclaimer: Any financial trading analysis offered here is our opinion and is not intended as advice or direction for investors. We cannot guarantee the success of any trades made as a consequence of this article, and we encourage traders to incorporate a strong money management strategy to limit losses when they enter the markets. Please use this article as part of your own research before formulating strategies prior to trading.
