GBP/JPY dives further, nears 201.00 as the Yen firms up

The Pound extends losses, reaching fresh three-week lows near 201.00
Fresh concerns about the UK's public finances are weighing on the Pound.
US Treasury Secretarythe Bessent assured that Japanese authorities will respect the BoJ's independence.

Guillermo Alcala FXStreet

The Pound remains heavily offered against the Japanese Yen for the second consecutive day on Wednesday. The pair depreciated about 1.34% in the last two days, retreating from levels above 204.00 to three-week lows near 201.00 at the time of writing.

The Sterling was hammered on Tuesday after the UK Office for Budget Responsibility (OBR) slashed its productivity growth forecasts for the next five years by 0.3%, likely adding a GBP 20 billion hole to the already strained public finances.

Furthermore, a gauge of UK shop inflation showed a significant moderation in price pressures, confirming the disinflationary pressures revealed at September's Consumer Prices Index release, and keeping hopes of further BoE monetary easing alive.

The Yen, on the other side, has received a boost from US President Donald Trump, who has praised Japanese Prime Minister Sanae Takaichi, after their meeting on Tuesday, and comments from US Treasury Secretary Bessent, assuring that the Japanese authorities will not threaten the Bank of Japan’s independence.

The BoJ is widely expected to keep its benchmark interest rate on hold after its meeting on Thursday, but Bessent’s words have boosted hopes of a rate hike in December or January, which has given a fresh impulse to the Yen.

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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