GBP/JPY rebounds sharply as investors digest UK’s weak factory activities

• GBP/JPY delivers a V-shape recovery from 183.20 as the BoJ is expected to continue tightening policy further.
• UK’s labor force shed and factory activities shrink due to higher interest rates by the BoE.
• Britain’s wage growth momentum strengthened further in July, warranting the need for an interest rate hike by the BoE.

The GBP/JPY pair discovered buying interest near 183.20 after a vertical sell-off that was inspired by weak factory activities in the United Kingdom economy in July. The cross recovered due to broader weakness in the Japanese Yen as the Bank of Japan (BoJ) is expected to keep the interest rate policy steady ahead.

BoJ Governor Kazuo Ueda commented recently that policymakers will continue to favor an expansionary monetary policy framework as core inflation remains a little below the desired target. The central bank is not expected to abandon negative interest rates but may tweak the Yield Curve Control.

On the United Kingdom front, the Office for National Statistics (ONS) reported monthly Industrial Production and Manufacturing Production contracted by 0.7% and 0.8%, while investors anticipated contraction by 0.6% and 1.0% respectively. The Gross Domestic Product (GDP) shrank by 0.5% in July against an expansion of 0.5%, recorded for June.

On Tuesday, the labor market data for July remained vulnerable. Three months to July Unemployment Rate rose to 4.3% as anticipated by market participants. UK employers shed 207K jobs in the three months to July, more than the 185K decline forecasted by markets. Laborforce reported retrenchment consecutively for the second month.

Meanwhile, wage growth momentum strengthened further in July, warranting the need for an interest rate hike by the Bank of England (BoE) on September 21. UK’s economic outlook is expected to weaken further as more interest rate hikes would impact the labor market and factory activities further.