GBP/JPY retreats from 204.00 amid fiscal concerns, BoE easing hopes

The Sterling dives to session lows below 203.00 against the Yen, after rejection at the 204.00 area.
News that UK Chancellor Reeves is planning to ditch tax-rising plans has hit the Sterling.
Yen rallies remain limited amid dwindling hopes of BoJ tightening in December.

Guillermo Alcala FXStreet

The Pound is retracing gains against the Japanese Yen on Friday, after failing to break above the 204.00 area. A combination of concerns about the UK’s fiscal health and weak macroeconomic data, which heightened hopes of a BoE rate cut, is weighing on the Sterling, which has dropped to session lows at 202.65 so far.

Pound crosses are trading lower on Friday, hit by a Financial Times report suggesting that Prime Minister Keir Starmer and finance minister Rachel Reeves would be considering ditching their plans to raise the income tax at the November 26 budget report. This move would be positive for the economy, but it might leave doubts about the UK's government debt unresolved.

UK economy slowed down in Q3

Beyond that, a raft of grim UK data releases on Thursday failed to improve confidence in the economic outlook. Preliminary Gross Domestic Product figures showed that growth slowed down to levels right above stagnation in the third quarter, with industrial and manufacturing production contracting sharply in September.

These figures have boosted expectations that the Bank of England will be forced to ease monetary policy further at its December meeting, which is weighing heavily on the Pound.

The Yen, on the other hand, is failing to fully capitalize on the Pound’s weakness as pressures from Japanese Prime Minister Sanae Takaichi on the Bank of Japan to keep interest rates at low levels have curbed hopes of a December rate hike and are keeping JPY’s upside attempts limited.

(This story was corrected on November 14 at 08:55 GMT to say that the GBP/JPY has dropped to session lows at 202.65, and not session highs, as previously stated.)

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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