How have fiscal concerns been impacting GBP & JPY performance?
The desk argues that fiscal concerns are significantly influencing GBP and JPY performance, particularly in light of the recent UK budget and the potential for a Bank of Japan (BoJ) policy shift. Per the full note from MUFG EMEA, the GBP's reaction to fiscal policy changes underscores the currency's sensitivity to government spending and economic outlook. Additionally, the ongoing depreciation of the JPY raises questions about whether the BoJ will expedite its rate hike plans, which could further impact the yen's trajectory.
What the desk is arguing
The recent discussions surrounding the UK budget highlight the sensitivity of the pound (GBP) to fiscal policy decisions. As the UK government navigates fiscal challenges, the GBP has displayed notable volatility, reflecting market anxieties over future economic stability.
Concurrently, a persistent weakening of the Japanese yen (JPY) raises questions about the Bank of Japan's (BoJ) forthcoming monetary policy maneuvers. If the yen continues to depreciate against major currencies, it could prompt a reevaluation of rate hike timelines by the BoJ, sparking further market speculation on interest rate trajectories for the region.
Where it sits in our coverage
Currently, our consensus target for GBP stands at 1.075, with a firm spread between 1.04 and 1.12, reflecting cautious optimism following recent fiscal adjustments. This view aligns closely with MUFG's emphasis on fiscal concerns impacting currencies, particularly as adjustments in monetary policy could be closely tied to potential shifts in fiscal health.
According to our coverage, key firms have differing perspectives on these currencies:
- Barclays: Targeting GBP at 1.09 for March 26.
- JPMorgan: Holding a target of 1.10 for March 26.
- Goldman Sachs: Estimated GBP at 1.12 for March 26.
How other firms see it
The reactions of other financial institutions to the ongoing fiscal pressures highlight a mix of alignment and divergence on currency forecasts. Some firms echo MUFG's sentiments regarding the GBP while taking a more cautious stance on the JPY.
- Deutsche Bank: Aligned with MUFG, suggesting heightened fiscal concerns will further influence GBP dynamics.
- BofA: Contrary to this view, anticipate a stronger JPY as conditions stabilize, setting a target at 1.04 for March 26.
- Nomura: While recognizing fiscal pressures, they forecast a less dramatic impact on JPY performance moving forward.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Fiscal concerns are significantly influencing GBP volatility post-UK budget.
- 02A continued weakness in JPY could prompt the BoJ to adjust interest rate strategies.
- 03Market speculation around GBP and JPY reflects broader economic anxieties.
Market implications
The interplay between fiscal policy and currency performance is likely to shape trading strategies moving forward, particularly for GBP investors monitoring the UK government's fiscal maneuvering.
Risks to this view
Potential risks include unexpected fiscal measures from the UK government that could further destabilize GBP, or shifts in global market sentiment that accelerate the yen's depreciation without corresponding action from the BoJ.
Welcome to the MUFG Global Markets FX Week Ahead podcast with Lee Hardman, Senior Currency Analyst at MUFG. It's Friday 28th November 2025. And joining Lee to pose some questions on the financial market themes for the week ahead is Seiko Katauka-Fisher, Director from Japanese Customer Sales for EMEA in London.
The following podcast is intended for professional investors and eligible counterparties only, and not for retail clients. Any content should not be regarded as an offer to conduct investment business or an investment recommendation, but for information purposes only. Hi Lee.
Hi Seiko. What currencies have been the biggest move over the past holiday shortened week? Yeah, we've seen the dollar correcting lower this week on the back of the U.S. rate market moving to price in another rate cut from the Fed in December.
That's been encouraged by the comments at the end of last week from New York Fed President Williams, who signaled that he still sees room for another rate cut. Obviously, as a kind of key member of the leadership team at the Fed, that is sending a kind of stronger signal that the Fed will look to try and push through at least one more rate cut. And that's been supported as well over the past week by some softer data releases from the U.S.
It looks certainly more likely now that core inflation will undershoot the Fed's year-end forecast, which at the margin could certainly put more pressure on the Fed to cut rates again in December as well. While the dollar's weakened, we've seen other currencies obviously strengthening. The biggest beneficiaries this week have been the more kind of high beta commodity related currencies, such as the New Zealand and Australian dollars.
They've been supported by the improvement we've seen in risk sentiment, and at the same time, a hawkish repricing of expectations for RBNZ and RBA policy going forward. We had the RBNZ meeting earlier this week, and while they lowered the policy rate again by 25 basis points to two and a quarter percent, the updated guidance did signal more strongly that that was likely the end of the rate cut cycle, which has helped to boost the Kiwi. And in Australia, we did see as well the release of more evidence of stronger inflation, which alongside the recent tightness we've seen in the labor market there, is making it more and more likely that the RBA will keep rates on hold for longer going into next year as well.
And then finally, the kind of other currency which has kind of benefited or outperformed this week has been the pound amongst major currencies. We saw a relief rally after the budget yesterday, which to us kind of mainly probably reflects some lightening up of short pound positions, which had kind of been built up ahead of the budget announcement. And yesterday, the budget obviously wasn't sufficient to trigger a sell off in the gold market.
Sources & References
How we cover this story