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.
So there was no need to keep such large short pound positions heading into year end. Having said that, though, we still feel that this rebound for the pound is unlikely to be sustainable. The focus will quickly shift back to the upcoming Bank of England meeting in December when we expect the Bank of England to resume cutting rates again.
And that should keep downward pressure on short term yields in the UK and the pound. We also think as well that the initial kind of relief over the budget, we don't think that's going to last. Certainly, if you look at the details of the budget, while there were no kind of nasty surprises to destabilize the gilt market, we would still say that the government did choose to increase taxes so that they can spend more on welfare.
And we think those policy choices, there's still doubts over the credibility of the commitment to higher taxes. As we know, a lot of those tax hikes have been planned for further into the future, closer to the next election. So it's certainly questionable to what extent the government will follow through with those tax hikes.
And additionally, obviously, a lot of those tax hikes as well will be on savings and also making it more expensive for businesses to employ workers. So for us, that's a negative development for the growth outlook for the UK as well. So all in all, we don't think the kind of short term relief rally for the pound will be sustained.
The Japanese yen has continued to weaken alongside the US dollar this week. What could change the weakening trend? Yeah, similar to other dollar crosses, dollar yen sort of peaked late last week at around 157.89.
And this week, it's failed to kind of advance further to the upside. Obviously, in part, that reflects the dovish repricing of Fed rate cut expectations and the broader kind of weaker dollar that we've seen this week. But in Japan as well, we do think that there is also some element there of investors becoming a bit more comfortable over the Japanese government's fiscal plans.
So we've now seen the release of the details for the Japanese government's extra budget. And that has helped to provide some comfort to investors. The size of the fiscal spending plan will total 18.3 trillion yen.
There had been some fears that that could have increased to over 20 trillion yen. So it does look like perhaps there had been some potential pushback there from the MOF trying to control the size of the spending package in Japan. And we've also had as well the release of the details of the funding package to finance that budget.
And we did find out that the government will be issuing 11.7 trillion of additional debt to fund the budget, of which 6.3 trillion is expected to be in the form of short term bills. So obviously, the government there is obviously trying to skew the debt issuance towards the short end of the curve to try and reduce selling pressure at the longer end of the curve. So that is, I think, helping the JGB market at the longer end to stabilize over the past week.
And I think that kind of stabilization there at the longer end of the curve has helped ease some of the yen selling pressure this week. We do think going forward, going into year end, the focus will probably shift back more towards the outlook for monetary policy in Japan with the BOJ's next meeting coming in December. Over the last week or two, we have had some more hawkish comments from BOJ officials, including Governor Ueda, who indicated that he'd be watching more closely the potential inflationary impact from the weak yen.
In light of those kind of more hawkish comments and the yen weakness that we've seen recently, our colleagues in Tokyo decided to bring forward their forecast for the timing of the next BOJ rate hike to December from January. And we think that if the BOJ does hike rates earlier in December, then that would be certainly more effective in reversing the yen weakening trend that's been in place recently than just, say, intervention on its own. I think if they just intervened and the BOJ left rates on hold, then I don't think that would be enough really to reverse this weakening trend for the yen.
Thank you very much, Lee. Thank you. Thank you for listening to this MUFG Global Markets podcast.
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