GBP/JPY drops to two-week low below 196.00 on UK political jitters
- GBP/JPY stays under strong selling pressure and trades below 196.00 on Wednesday.
- UK gilt selloff weighs on Pound Sterling.
- UK Prime Minister Keir Starmer refused to confirm that finance minister Rachel Reeves will remain in her position.
Pound Sterling stays under heavy selling pressure on Wednesday as markets assess the latest political developments in the UK. At the time of press, GBP/JPY was trading at its lowest level in two weeks near 195.50, losing 0.8% on a daily basis.
British finance minister Rachel Reeves seemed visibly upset during PMQs on Wednesday after Prime Minister Keir Starmer refused to guarantee that she would remain in her position until the next election. This development triggered a selloff in UK government bonds, with the yield on the 10-year reference rising more than 4% on the day to its highest level since June.
Although Starmer's press secretary later said that Reeves has the full support of the Prime Minister, markets largely ignored this comment. "The chancellor is going nowhere, she has the prime minister's full backing," press secretary told reporters.
Reflecting the broad-based GBP weakness, EUR/GBP was last seen rising nearly 1% on the day above 0.8650, while GBP/USD was down more than 1% near 1.3600.
Pound Sterling FAQs
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).
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.
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.
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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