Forex News

• GBP/JPY rises for a second day as elevated Oil prices weigh on the Japanese Yen.
• Markets stay cautious ahead of Trump’s 20:00 ET deadline for Iran to open the Strait of Hormuz.
• Interest rate divergence between the BoE and BoJ underpins upside in GBP/JPY.

The British Pound (GBP) trades with a mild upside bias against the Japanese Yen (JPY) on Tuesday, as elevated Oil prices stemming from the ongoing US-Iran war weigh heavily on Japan’s economic outlook, keeping the Yen on the defensive against most major peers.

At the time of writing, GBP/JPY is trading around 211.60, hovering near one-week highs.

Traders remain cautious ahead of a key deadline set by US President Donald Trump, who warned Iran to “make a deal or open up the Strait of Hormuz” by 8:00 p.m. Eastern Time (00:00 GMT on Wednesday). Trump has threatened to target Iran’s energy and civilian infrastructure if no agreement is reached.

As a major net energy importer, Japan is particularly vulnerable to rising Oil prices, which increase the country’s import bill, widen trade deficits, and weigh on the currency. Japan’s Finance Minister Katayama said authorities “will have to respond to the environment surrounding the Japanese economy, considering the Middle East situation,” adding that policymakers are “checking all scenarios, including optimistic and pessimistic ones, in terms of oil stockpiles.”

While higher inflation expectations may keep the Bank of Japan (BoJ) on a gradual tightening path, the hit to economic growth from elevated energy costs could limit the pace of further policy normalization.

Meanwhile, the UK is also a net energy importer, but its exposure is relatively lower than Japan’s, making the impact of the energy shock less severe.

Still, with economic growth already fragile and inflation remaining above the Bank of England (BoE) target, policymakers are expected to keep interest rates higher for longer, with markets pricing in up to two rate hikes by year-end.

Against this backdrop, the outlook for GBP/JPY remains tilted to the upside, supported by widening interest rate differentials. However, further gains may be limited, as intervention risks loom with USD/JPY trading close to the 160 level, an area that has previously triggered official action from Japanese authorities.

Nordea analysts Jan von Gerich, Tuuli Koivu and Anders Svendsen now expect the European Central Bank (ECB) to prioritise inflation over growth as the Middle East conflict prolongs and broader price pressures build. They forecast four 25bp hikes starting in June, taking the deposit rate to 3% by October and staying there through 2027, with risks skewed towards earlier or larger moves.

ECB seen front‑loading inflation response

"We expect the ECB to prioritise inflation worries over growth concerns, and now forecast four 25bp rate hikes in total this year."

"When combining these elements, we expect in our new baseline that the ECB starts to raise rates by 25bp at the June meeting, and then continue hiking rates in 25bp increments in consecutive meetings four times in total to bring the deposit rate to 3% in October."

"We then expect rates to remain at that level for the remainder of our forecast horizon until the end of 2027."

"If the ECB was really worried about the price outlook, it could start raising rates as early as at the April meeting or alternatively hike by more than 25bp in June, but we think 25bp remains the most likely initial step for now."

"One could simplify the outlook by arguing that while the timing of the first hike depends heavily on the development of the conflict and energy prices, the number and pace of subsequent hikes will depend more on how the broader prices pressures evolve and how well the economy performs amidst the headwinds of higher energy prices, elevated uncertainty and rising rates."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

TD Securities analysts note Swedish CPIF and CPIF ex-Energy inflation for March surprised sharply to the downside, driven mainly by weaker Food and Recreation, Sport & Culture prices, partly offset by petrol. They highlight that the central bank of Sweden, Riksbank had recently leaned hawkish, but argue that unless this weak inflation is quickly reversed, policymakers are likely to remain on hold for longer than previously signaled.

Weak CPIF print challenges hawkish stance

"Flash inflation for the month of March surprised materially to the downside in Sweden, with CPIF decelerating a tick to 1.6% y/y (mkt: 2.2%), while CPIF ex-Energy dropped 0.3ppt to 1.1% y/y (mkt: 1.5%)."

"The decline in inflation came principally from lower Food and Recreation, Sport & Culture prices, while petrol prices of course provided an offsetting boost to the headline CPIF measure."

"The Riksbank had been leaning in a hawkish direction at its last meeting, but this weak inflation data, if not reversed, might keep them on the sidelines for longer."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)

Federal Reserve Bank of New York President John Williams told Bloomberg on Tuesday that the impact of the Iran war will drive up headline inflation.

Key takeaways

"Inflation this year should be around 2.75%."

"Fed is very focused on underlying inflation."

"Story on core inflation hasn't changed very much."

"Tariffs remain a big part of the inflation story."

"Monetary policy is exactly where it needs to be, can be changed if needed."

"Expecting 2% to 2.5% GDP this year with stable unemployment rate."

"Labor market situation is pretty complicated."

"Job market is low hire, low fire."

"Underlying inflation to moderate later this year."

"US economy is remarkably resilient, tech broadly is helping productivity levels."

"Compensation growing consistent with productivity, not pressuring inflation."

"Businesses have been adapting to more uncertain world."

"Fed is focused on work, leadership concerns are not an issue."

Market reaction

The US Dollar Index stays in the lower half of its tight daily range and was last seen losing 0.07% at 99.92.

• US Durable Goods Orders declined more than expected in February.
• US Dollar Index stays in daily range at around 100.00.

Durable Goods Orders in the United States (US) declined 1.4%, or $4.4 billion, to $315.5 billion in February, the US Census Bureau reported on Tuesday. This print followed the 0.5% decline recorded in January and came in worse than the market expectation for a decrease of 0.5%.

"Excluding transportation, new orders increased 0.8 percent. Excluding defense, new orders decreased 1.2 percent," the press release read. "Transportation equipment, also down four of the last five months, drove the decrease, $6.1 billion or 5.4 percent to $106.1 billion."

Market reaction

These figures don't seem to be having a noticeable impact on the US Dollar's (USD) performance. At the time of press, the USD Index was marginally lower on the day at 99.92.

Brown Brothers Harriman’s (BBH) Elias Haddad expects the Reserve Bank of New Zealand (RBNZ) to keep the OCR at 2.25%, with Governor Breman set to update growth and inflation projections. Despite economic slack, elevated inflation and market pricing of nearly 100 bps of tightening limit policy flexibility. Haddad warns a prolonged energy shock and weak terms of trade will keep NZD defensive versus major currencies.

Limited RBNZ room leaves NZD vulnerable

"The RBNZ is widely expected to leave the Official Cash Rate (OCR) unchanged at 2.25% for a second straight meeting (Wednesday). There is no updated Monetary Policy Statement (MPS) associated with this meeting, but Governor Anna Breman flagged an update to the bank’s inflation and growth outlook."

"In a speech delivered on March 24, Breman already warned of “somewhat weaker economic growth in 2026” than anticipated in the February MPS and signaled that the bank will look through “a short-lived disruption and a temporary increase in petrol prices.”"

"The RBNZ has limited room to sidestep tightening despite excess slack in the economy given that headline inflation is already slightly above the 1 to 3% target range and most measures of core inflation are above the target mid‑point. The swaps curve price in nearly 100bps of OCR increases in the next twelve months."

"A prolong energy shock will keep NZD trading on the defensive against most major currencies, weighed down by New Zealand’s unfavorable terms of trade dynamic and heightened stagflation risk."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)