British Pound jumps against the Japanese Yen as UK PM Starmer steps down

GBP/JPY jumps to session highs past 214.00 following news of UK PM Starmer's resignation.
The market has welcomed the news as they end a period of intense political uncertainty.
The Yen is nearing 40-year lows against the US Dollar, which might trigger a Tokyo intervention.

Guillermo Alcala FXStreet

The British Pound (GBP) accelerates its recovery against the Japanese Yen (JPY) on Monday to test levels above 214.00 at the time of writing. The Sterling is being boosted across the board, as investors welcome the decision of the United Kingdom Prime Minister, Keir Starmer, to step down.

Starmer appeared outside the 10th of Downing Street earlier this morning to announce that he is resigning as Prime Minister and as leader of the Labour Party. He also added that he will remain at the office until the party chooses a new leader.

A widely expected decision

The market reaction has been positive, as the resignation was widely expected since the weekend. Starmer’s position as prime minister was seriously questioned following a defeat in the local elections in England, Wales, and Scotland, which delivered a sound victory to Nigel Farage’s Reform UK populist party.

The Manchester Mayor, Andy Burnham, emerges as the best-positioned candidate for the job. Burnham secured a seat in parliament last week after winning a by-election in Makersfield, a condition for running for the country’s premiership, which dealt the final blow to Starmer.

The Japanese Yen, on the other hand, remains on its back foot, with the USD/JPY pair trading a few pips shy of the 40-year highs, at 161.95, which is considered the new line in the sand for Tokyo authorities. Japanese Finance Minister Satsuki Katayama reiterated that the authorities are ready to “respond to currency moves”, a warning that has been issued several times over the last few weeks.

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.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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