GBP/JPY slides back below 211.00 mark amid geopolitical tensions, BoE-BoJ divergence
- GBP/JPY attracts some sellers on Tuesday and is pressured by a combination of factors.
- The UK political uncertainty and BoE easing expectations act as a headwind for the GBP.
- Rising geopolitical tensions benefit the JPY’s safe-haven status and weigh on the cross.
The GBP/JPY cross meets with some supply near the 211.35 area during the Asian session on Tuesday and stalls the previous day’s goodish rebound from the 209.00 mark, or a four-day low. Spot prices slide back below the 211.00 mark in the last hour, though the intraday downtick lacks bearish conviction.
The British Pound (GBP) continues with its relative underperformance on the back of domestic political uncertainty, especially after the Green Party's landmark victory in the Gorton and Denton by-election. The outcome was seen as a major blow to the UK Prime Minister Keir Starmer’s ailing authority and sparked further questions over his leadership of the party. This, along with the Bank of England (BoE) easing expectations, undermines the GBP and acts as a headwind for the GBP/JPY cross.
In fact, BoE Governor Andrew Bailey said during his testimony before the Parliament’s Treasury Committee last week that there is scope for rate cuts amid expectations that inflation will return to the 2% target. In contrast, BoJ Governor Kazuo Ueda said last Thursday that the basic stance is to continue raising rates if the likelihood of our economic and price forecasts materializes. Apart from this, rising geopolitical tensions benefit the safe-haven Japanese Yen (JPY) and exert pressure on the GBP/JPY cross.
Meanwhile, data released last Friday showed that the core consumer inflation in Tokyo – Japan's capital city – fell below the Bank of Japan's (BoJ) 2% target for the first time since 2024. Adding to this, reports that Japan's Prime Minister Sanae Takaichi had expressed reservations about additional monetary tightening during her meeting with the governor temper hopes for an immediate rate hike by the BoJ. This could act as a headwind for the JPY and offer some support to the GBP/JPY cross.
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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