British Pound edges lower vs JPY on UK politics, intervention fears; looks to UK PMIs

GBP/JPY meets with some supply on Tuesday amid a combination of negative factors.
The UK political chaos undermines the GBP, while intervention fears support the JPY.
The divergent BoE-BOJ policy expectations warrant caution for aggressive bullish traders.

Haresh Menghani FXStreet

The GBP/JPY cross struggles to capitalize on the previous day's solid intraday bounce from the vicinity of a one-month trough, touched last week, and edges lower on Tuesday. Spot prices, however, lack bearish conviction and currently trade just below the 214.00 mark amid mixed fundamental cues.

The British Pound (GBP) is pressured by mounting UK political crisis following UK Prime Minister Keir Starmer's resignation as leader of the governing Labour Party. This, in turn, is seen as a key factor acting as a tailwind for the GBP/JPY cross. However, the underlying bearish sentiment surrounding the Japanese Yen (JPY) helps limit the downside as traders now look forward to the flash UK PMIs for some impetus.

Despite positive signals from US-Iran peace talks, investors remain worried that Japan's economy will remain under strain due to the continued energy supply disruptions through the Straight of Hormuz. This overshadows fears that Japanese authorities will step in again to prop up the domestic currency. Even hawkish Bank of Japan (BoJ) expectations fail to impress the JPY bulls, lending some support to the GBP/JPY cross.

In fact, Minutes of the BoJ's April meeting showed last week that some board members called for raising rates ‌more swiftly to avoid underlying inflation from overshooting. Meanwhile, a private survey showed that Japanese firms faced the sharpest rise in input costs in nearly four years. Adding to this, BoJ's core consumer inflation rate excluding one-off factors remains above the 2% target, bolstering bets for further policy tightening.

In contrast, traders have been scaling back expectations of a rate hike by the Bank of England (BoE) following the release of softer inflation figures last week. Adding to this, the US-Iran peace deal eased concerns about the energy shock, endorsing the view that the BoE will hold rates steady in the coming months. This might hold back traders from placing aggressive bullish bets around the GBP/JPY cross and cap any meaningful gains.

Economic Indicator

S&P Global Services PMI

The Services Purchasing Managers Index (PMI), released on a monthly basis by S&P Global, is a leading indicator gauging business activity in the UK’s services sector. Survey responses reflect the change, if any, in the current month compared to the previous month and can anticipate changing trends in official data series such as Gross Domestic Product (GDP), employment and inflation. The index varies between 0 and 100, with levels of 50.0 signaling no change over the previous month. A reading above 50 indicates that the services economy is generally expanding, a bullish sign for the Pound Sterling (GBP). Meanwhile, a reading below 50 signals that activity among service providers is generally declining, which is seen as bearish for GBP.

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