GBP/JPY pops up above 213.00 even as UK local elections point to Labour party losses

GBP/JPY edges up above 213.00, on track to end the week near opening levels.
The Pound Sterling is shrugging off news of a significant setback to the UK Labour Party in local elections.
The Japanese Yen's downside attempts are likely to be short-lived as intervention risks remain high.

Guillermo Alcala FXStreet

The Pound Sterling (GBP) is one of the strongest performers on Friday, showing moderate gains against the Japanese Yen (JPY). The GBP/JPY pair returns above 213.00 at the time of writing, and is on track to end the week near opening levels. The Sterling has managed to pare losses from an alleged intervention from Japanese authorities on Wednesday as traders await the results of Thursday’s UK local elections.

The GBP manages to shrug off the first results from polls in the UK, which so far point to a significant reversal for the Labour Party. Prime Minister Keir Starmer’s ruling party has lost control of eight councils amid the emergence of Nigel Farage’s Reform UK, which, according to partial scrutiny, has taken more than 350 seats in local councils.

Starmer said earlier on Friday that he takes responsibility for a highly likely reversal, but assured that he is not thinking of resigning: "I am not going to walk away and plunge the country into chaos,” he said after the first results of the voting were published.

Traders, on the other hand, are likely to be wary of holding large Japanese Yen shorts as risks of further interventions from Japanese authorities remain alive. Japanese top currency diplomat, Atsushi Mimura, warned on Thursday that Tokyo has no constraints on how often it can intervene to support the Yen and affirmed that he is in daily contact with US authorities, suggesting the possibility of coordinated action to stem speculative JPY selling.

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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