GBP/JPY struggles around mid-212.00s amid BoJ rate hike bets and UK political turmoil

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The GBP/JPY cross attracts sellers for the second straight day and slides back closer to the overnight swing low during the early part of the European session on Tuesday. Spot prices, however, remain confined in a one-week-old range and currently trade just above mid-212.00s.

GBP/JPY drifts lower for the second straight day, though it lacks follow-through selling.
Intervention fears and BoJ rate hike bets boost the JPY, exerting pressure on the cross.
The UK political chaos contributes to the GBP’s underperformance and the intraday fall.

The outcome of Japan's snap election on Sunday removes domestic political uncertainty. This, along with intervention warnings from Japanese authorities, underpins the Japanese Yen (JPY). Apart from this, bets that the Bank of Japan (BoJ) will stick to its policy normalization path lend additional support to the JPY, which, in turn, is seen as a key factor exerting pressure on the GBP/JPY cross.

The British Pound (GBP), on the other hand, continues with its relative underperformance on the back of political risk following the resignation of UK Prime Minister Keir Starmer's chief aide, Morgan McSweeney. Moreover, the Scottish Labour leader called for Keir Starmer to resign over the fallout from the Jeffrey Epstein scandal. This further contributes to the offered tone surrounding the GBP/JPY cross.

Meanwhile, firming expectations that the Bank of England (BoE) will cut interest rates again mark a significant divergence in comparison to the BoJ's hawkish outlook and favor the GBP/JPY bears . However, concerns about Japan's fiscal situation on the back of Prime Minister Sanae Takaichi's spending plans and a positive risk tone could cap the safe-haven JPY, which could limit losses for spot prices.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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