GBP/JPY sinks as Wall Street sells off following Target’s worst day since Black Monday 1987

• GBP/JPY is sinking in the market rout due to fears of runaway inflation. 
• Wall Street stocks were pressured as Target reported that higher-than-expected costs ate into its quarterly earnings.

At 158.20, GBP/JPY is down some 2% at the time of writing as risk appetite fades due to concerns about the outlook for global economic growth and rising inflation that has knocked sentiment. The moves in markets could be a delayed reaction to Tuesday’s rhetoric from the US Federal Reserve Chair Jerome Powell who amplified a strong hawkish tone.

Powell pledged the US central bank would ratchet up interest rates as high as needed, including taking rates above neutral, in order to cap runaway inflation that he said threatened the foundation of the economy. The initial reaction was a firmer US dollar and risk-off in financial markets, but the moves were soon pared and the US benchmarks rallied to fresh highs on the day.

However, the mood has been soured on Wednesday on Wall Street. The retailer, Target, reported that higher-than-expected costs ate into its quarterly earnings. The stock fell over 25% and was tracking its worst day since the Black Monday crash on Oct. 19, 1987, highlighting worries about the US economy after the retailer became the latest victim of surging prices. 

Interest-rate sensitive mega-cap growth stocks added to the declines on Wall Street and pulled the S&P 500 and Nasdaq lower. Tesla Inc lost 7.5%, Nvidia and Amazon both lost more than 6% and Apple and Microsoft each fell over 4%. Consequently, US Treasury yields have fallen as investors pile into safety, leading to a rout in risk assets. This in turn has put a bid into the yen, sinking GBP/JPY  to a low of 158.11 in recent trade.

GBP is not out of the woods

Meanwhile, the pound is also feeling the heat, losing over 1% vs. the US dollar despite the stronger than expected UK labour data released the prior day that has raised the prospect that the Bank of England may have to go further with policy tightening to rein in inflationary pressures.  

However, as analysts at Rabobank argued, ”while a strong labour market is a good reflection of economic health, it is not good news for everyone insofar as higher interest rates will compound the impact of the cost of living crisis for many lower-income households.”

”We continue to view the medium-term outlook for risk appetite as vulnerable and don’t view GBP/USD as being out of the woods,” the analysts at Rabobank argued. 

As for Japan’s economy, Wednesday’s release of Japanese preliminary Q1 Gross Domestic Product data was better than expected although it still showed a -0.2% QoQ contraction which highlights the continued vulnerability of the Japanese economy and justifies the central bank’s continued support from both fiscal and monetary fronts.

”While better Japanese current account data and a bout of short-covering have pushed USD/JPY away from its recent highs, we continue to see the potential for further upside over the summer as the Fed continues to hike rates.  Assuming an improvement in Japanese economic data, speculation of a potential alteration to the BoJ’s YCC policy has the potential to rein back USD/JPY into the autumn,” the analysts at Rabobank explained. 

This week’s inflation data will be important for the yen. Japanese April Consumer Price Inflation is expected to show a headline rate of 2.5% YoY.  The analysts at Rabobank, however, explain that underlying inflation is expected at a much softer +0.7% YoY a snapback from the deflationary -0.7% YoY released the previous month. ”Comments from ex-BoJ board member Sakurai have suggested that if inflation were to hold above the 1% y/y area, there may be room for the BoJ to tweak its YCC policy in the autumn.”