FX Weekly

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A tough week for the GBP & JPY

FX View:

The GBP has underperformed alongside the JPY over the past week hit by a plethora of negative developments. Firstly, weak UK economic data releases have reinforced market expectations for more active BoE rate cuts weighing on UK short rates and the GBP. Unless there is a significant upside surprise from the UK CPI report for October released in the week ahead, we expect the BoE to cut rates again as soon as next month. Secondly, there has been some renewed unease over the government’s fiscal plans ahead of the Autumn Statement. A package of fiscal tightening measures without an income tax hike is viewed as less credible although it does reflect good news that the fiscal hole is smaller than expected. Breaking a manifesto pledge would have been politically damaging for Labour at a time when confidence is slipping in the party leadership. In Japan, the JPY sell-off is creating more concern amongst domestic policymakers but we are not convinced that direct intervention will take place yet. JPY weakness could extend in the week ahead if the Q3 GDP report from Japan reveals a deeper contraction and/or the government’s supplementary budget plans are bigger than expected.

GBP & JPY UNDERPERFORM AS USD CORRECTS LOWER

Source: Bloomberg, 16.00 GMT, 14th November 2025 (Weekly % Change vs. USD

Trade Ideas:

We are maintaining our long EUR/GBP, and short CAD/CHF and USD/JPY trade ideas.

JPY Portfolio Flows :

Foreign investors bought JPY 6,245bn worth of Japanese equities in October, the largest one-month total on record.

UK Political Turbulence: GBP Market Impact:

Political uncertainty during leadership transitions materially impacts GBP, particularly against USD and EUR. The impact tends to strengthen across extended horizons, signalling sustained uncertainty rather than a brief, one-day shock.

FX Views

JPY: Approaching the danger zone?

The US dollar (DXY basis) is trading around 0.3% weaker today relative to last week’s close and is a little over 1.0% weaker from the intra-day high recorded on 5^th November. The move at this juncture looks more technical and the failure to advance from that high last week could well have encouraged liquidation of long dollar positions. Also encouraging is the end of the US government shutdown this week which is set to result in the release of three NFP reports before the end of the year – a period in which investors would usually only be waiting for one more. The modest weakness of the dollar was not broad-based either – USD/JPY advanced this week, and is currently trading around 0.6% higher. The dollar remains around unchanged versus the pound.

The Ministry of Finance has now instigated yen buying intervention on seven separate trading days in the post-covid global inflation shock period. The first three episodes were in Sept/Oct 2022 followed by two episodes in Apr/May 2024 and a further two episodes in July 2024. We are already above all the highs in USD/JPY when intervention took place in Sept/Oct 2022 (151.95 was the highest intra-day level in those three operations) but are below the intra-day highs on the intervention days in 2024 – 157.99 being the lowest when intervention took place on 1^st May. The 2022 intervention could be deemed a success – USD/JPY dropped around 17% from October 2022 to January 2023 and the 2022 intervention levels were not revisited again for nearly a year. Yields in the US fell sharply as inflation fears started to recede. The Apr/May 2024 intervention impact was brief with levels revisited again within a month. The July 2024 intervention was more impactful with a 14% drop and those levels yet to be retested. US yields again did drop sharply in that episode. Some of the comments used by MoF officials ahead of previous interventions have been cited recently “watching FX moves with a strong sense of urgency” for example) but a move to using words like “can’t tolerate” would be a strong signal of imminent action.

The bigger moves in previous intervention always coincided with a bigger drop in US yields and with PM Takaichi citing this week that it can’t be concluded that deflation in Japan is over, it seems unlikely we will get policies supportive for the yen. Real GDP data for Q3 will be released on Monday and will likely confirm contraction, which will only reinforce political momentum for fiscal stimulus. The government is planning to approve a fiscal spending package next week that could amount to JPY 15trn.

Market participants will likely view the threat of intervention at this stage as low and only a move toward the 160-level will elevate that threat. An ultra-cautious BoJ and inflation fiscal policies by new PM Takaichi is currently proving more influential than US yield developments – a bigger drop in US yields may be required to lower USD/JPY

NO JAPAN POLICY SHIFT MEANS INTERVENTION FAILS

Source: Bloomberg, Macrobond & MUFG GMR

10-YEAR REAL YIELD SREAD NOT SUPPORTING JPY

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Downside risks for GBP intensify ahead of Autumn Statement 

The GBP has been one of the worst performing G10 currencies over the past week. It has resulted in EUR/GBP extending its advance above resistance at the 0.8800-level and hitting a high of 0.8865. Recent price action is supportive of our long EUR/GBP trade idea, and the pair is moving closer to our target set at 0.8900. The GBP sell-off has been reinforced over the past week by a combination of negative UK economic data releases, domestic political uncertainty and some renewed investor unease of the UK’s public finances ahead of the Autumn Statement scheduled for 26^th November.             

Firstly, the GBP has been undermined by building expectations for more active BoE rate cuts. The releases this week of the latest UK labour market report and GDP report for Q3 have added to concerns over the health of the UK economy. The labour market report revealed that labour demand remained weak and labour market conditions continued to loosen. Payrolled employment has been weak since last year’s Autumn Statement when the government raised the cost of employment by lifting employer National Insurance Contributions. Furthermore, the latest monthly readings for September and October suggest the pace of job losses has increased although monthly readings have tended to be revised higher over time. Loosening labour market conditions were highlighted by the unemployment rate rising up to 5.0%. The report should give the BoE more confidence that wage growth will continue to slow. At the same time, the release of the GDP report for Q3 revealed that economic growth slowed for the second consecutive quarter after the strong start to the year in Q1. Quarterly growth is following a similar pattern to last year. Growth was hit in September by the prolonged shutdown for JLR triggered by the cyberattack. The softer economic data flows support our forecast for another BoE rate cut as soon as next month. Key swing voter Bailey wanted to see if softer inflation from September would be sustained when he voted to leave rates on hold earlier this month. The release of the CPI for October in the week ahead will be a key test. Unless there is a significant upside surprise, we expect the BoE to vote for a cut in December.                           

Secondly, the GBP has been undermined at the end of this week by some renewed investor jitters over the government’s fiscal plans ahead of the Autumn Statement. In light of recent communication from the government, market participants had increasingly built into their expectations that the Autumn Statement would include an income tax hike. The long end of the gilt market has rallied strongly in anticipation of the government’s fiscal  tightening measures benefitting as well from BoE rate cut expectations that have brought down the short end of the curve, and the decline in market-based measures of inflation expectations. It helped the 30-year gilt yield to drop by around 60bps from the September peak. However, it was never a done deal that the government would raise income taxes given it would break their manifesto pledge and be very unpopular with the public and potentially create unrest in the Labour Party. The government has now confirmed that an income tax hike will be avoided after an improved fiscal forecast from the Office for Budget Responsibility. According to reports, the fiscal hole that the government has to fill has been reduced to GBP20 billion from up to GBP30 billion. As part of the government’s updated plans, they are still aiming to create a buffer of at least GBP15 billion. While news of a smaller fiscal hole is good news for the government, their decision to drop plans for an income tax cut has created some unease among market participants who view a fiscal tightening package without an income tax hike as less credible. The yield on the 30-year gilt yield did initially jump higher by 15bps today giving back around half of the decline recorded in October. The unfavourable market reaction is partly a reflection of poor government communication.                            

EUR/GBP VS. SHORT-TERM YIELD SPREAD

Source: Bloomberg, Macrobond & MUFG GMR

GILTS HAVE OUTPERFORMED RECENTLY

Source: Bloomberg, Macrobond & MUFG GMR

Thirdly, the pound has been undermined by the pick-up in domestic political uncertainty. There has been fresh speculation over a potential leadership challenge to Prime Minister Starmer. Media reports have suggested that Health Secretary Wes Streeting was considering mounting a leadership challenge. It follows on from earlier reports from back in September that Manchester Mayor Andy Burnham was similarly considering a leadership challenge. While the latest potential leadership challenge has been denied, it does indicate a loss of confidence in the current Labour leadership. Labour has seen their support drop sharply in the polls since they have been in power, and Prime Minister Starmer’s approval rating is among the lowest on record for a sitting Prime Minister. The key challenge will be next year’s local elections in May where if Labour perform badly could trigger a leadership challenge. After recent reforms, a leadership challenge requires support from at least 20% of Labour MPs which currently equates to 81. It was raised up from 10% at the 2021 Labour Party Conference which makes it more difficult for left-wing candidates like former PM Jeremy Corbyn to get on the ballot helping to reduce the risk of a bigger negative reaction for the GBP and gilts if a leadership challenge takes place next year.    

In other news this week, it was reported that Scotland plans to sell GBP1.5 bonds in the coming years. It would be the first debt issuance by Scotland separately from UK debt issuance since the 17th century. Scotland can issue its own debt but under strict conditions set by UK law and fiscal frameworks. The Scotland Act 2012 and subsequent fiscal frameworks granted powers for Scotland to borrow for capital investment but not for day-to-day spending. Borrowing is subject to limits and oversight by HM Treasury and Scottish Fiscal Commission. Scottish First Minister Swinney noted that the bond sales would be subject to the outcome from the parliamentary elections in May as well as market conditions and Edinburgh’s borrowing requirements. The SNP currently falls just short of a majority in parliament. The “Kilt” bonds are expected to trade at a small discount to Gilts to reflect lower liquidity but will have the same credit rating as the UK. We see no immediate implications for the GBP from the Scottish government’s plans to issue a small amount of “Kilt” bonds although the SNP has characterised the bond sales as a way of building credibility with financial markets as part of their long-term goal for independence. Public opinion polls have shown a pick-up in support for Scottish independence this year with 8 out of 13 polls showing a majority in favour. A development that should benefit the SNP in next year’s Scottish parliamentary elections.     

Weekly Calendar

Source: Bloomberg & MUFG GMR

Key Events:

• The US government shutdown has now come to an end. Market participants will be eagerly awaiting the release of delayed economic data in the week ahead including likely the NFP report for September although not confirmed. It will help provide more clarity for the Fed as they continue to assess whether to cut rates further in December. Updated guidance from the last FOMC meeting indicated another cut in December was far from a done deal. The release of minutes from the last FOMC meeting in the week ahead will provide further insight into how divided the committee is over the policy outlook.
• The release of the latest GDP report from Japan for Q3 is expected to reveal that the economy was hit by trade disruption resulting in GDP contracting for the first time since Q1 2024. Weaker growth will support the government’s plans for a bigger supplementary budget. The exact size of the stimulus package is not yet clear although is expected to exceed last year’s total of JPY13.9 trillion. It may add to the BoJ’s caution over resuming rate hikes although the economic downturn is expected to prove short-lived.
• The release of the latest UK CPI report for October will be scrutinized closely after inflation came in much weaker than expected in September. We expect the October CPI report to provide reassurance that inflation has peaked for this year and is likely to slow heading into next year. Governor Bailey has indicated that he is likely to vote for a cut in December unless there is a significant upside inflation surprise in the October and/or November CPI reports. The release of the latest PMI surveys from the UK for November will be watched closely as well to see if recent budget uncertainty have put a dampener on business confidence.