GBP/JPY weakens as UK political turmoil contrasts with Yen's post-election stability

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The British Pound (GBP/GBP) edges lower against the Japanese Yen on Tuesday, as renewed political uncertainty in the UK weighs on the Pound. At the time of writing, GBP/JPY is trading around 212.00, down nearly 0.70% on the day.

GBP/JPY remains under pressure as UK political turmoil and renewed leadership uncertainty weigh on the Pound.
The Japanese Yen finds support after a decisive election outcome in Japan and continued warnings from local authorities against excessive currency moves.
Attention turns to key UK GDP, Industrial Production and Manufacturing Production data due on Thursday.

In the UK, political uncertainty has intensified after Prime Minister Keir Starmer came under growing pressure to resign following his decision to appoint Peter Mandelson as the UK’s ambassador to the United States, a move that has drawn fresh criticism over Mandelson’s past links to Jeffrey Epstein.

Despite the mounting pressure, Keir Starmer has ruled out stepping down, saying he is “not prepared to walk away” and vowing to “fight on” after securing public backing from several senior Cabinet ministers at a meeting with the Parliamentary Labour Party on Monday.

Investors are increasingly wary that a potential change at the top could raise the risk of looser fiscal discipline and higher government borrowing.

In contrast, political risks in Japan have eased after Prime Minister Sanae Takaichi secured a decisive and historic election victory, with her ruling Liberal Democratic Party winning 316 of the 465 seats in the lower house. The strong mandate has helped the Japanese Yen stabilise and recover against its major peers, adding further downside pressure on GBP/JPY.

Meanwhile, repeated verbal warnings from Japan’s Ministry of Finance are keeping traders on alert, as officials reiterate their readiness to respond to excessive currency moves, providing additional near-term support to the Yen.

On the data front, the UK’s BRC Like-for-Like Retail Sales for January came in at 2.3% YoY, improving from the previous 1.0% and beating market expectations of 1.2%.

Looking ahead, the economic calendar in Japan remains relatively light through the rest of the week, while attention in the UK shifts to Gross Domestic Product (GDP), Industrial Production and Manufacturing Production data, due on Thursday.

GDP FAQs

What is GDP and how is it recorded?

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

How does GDP influence currencies?

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

How does higher GDP impact the price of Gold?

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.