GBP/JPY remains close to multi-year peak as UK-Japan rate gap and Iran risks undermine JPY
- GBP/JPY attracts buyers for the second consecutive day amid a combination of supporting factors.
- The UK-Japan rate gap and economic risks stemming from the Mideast conflict weigh on the JPY.
- Easing UK political uncertainty and the hawkish BoE benefit the GBP, further supporting the cross.
The GBP/JPY cross scales higher for the second straight day and climbs to a fresh weekly top, around the 217.70 region, during the first half of the European session on Wednesday. Moreover, spot prices remain within striking distance of the highest level since January 2008 and seem poised to appreciate further amid a supportive fundamental backdrop.
Despite looming intervention risks, the Japanese Yen (JPY) continues with its relative underperformance on the back of the wide gap in borrowing costs between Japan and other major economies, including the UK. The Bank of Japan (BoJ) raised the short-term policy rate in June to 1% or, the highest level since 1995, while the Bank of England's (BoE) base rate sits at 3.75%. This leaves an approximate gap of 275 basis points (bps), which keeps the so-called JPY carry trade active and continues to act as a tailwind for the GBP/JPY cross.
Meanwhile, Japan's economy is highly vulnerable to energy supply disruptions in the Strait of Hormuz as it relies on the Middle East for over 90% of crude oil imports. The closure of the critical waterway, along with a further escalation of tensions between the US and Iran, turns out to be another factor undermining the JPY. The British Pound (GBP), on the other hand, benefits from fading UK political uncertainty, hawkish BoE signals, and modest US Dollar (USD) weakness. This validates the positive outlook for the GBP/JPY cross and favors bulls.
Speaking before the Treasury Select Committee, BoE Governor Andrew Bailey warned on Tuesday of the potential effects of the resumption of the US-Iran conflict and that the event has demonstrated that inflation has not eased enough. Traders were quick to fully price in at least one 25 bps rate increase by year-end, and a possible first hike as early as September. This, in turn, suggests that the path of least resistance for the GBP/JPY cross is to the upside, and any corrective pullback is more likely to be seen as an opportunity for bullish traders.
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.
Author
Haresh Menghani
FXStreet
Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.
