GBP/JPY retreats from YTD peak as surging UK bond yields weigh on GBP

GBP/JPY struggles to capitalize on its intraday gains back closer to the year-to-date peak.
A sharp rise in the long-dated UK bonds weighs heavily on the GBP and the currency pair.
The BoJ uncertainty continues to undermine the JPY and should limit losses for spot prices.

Haresh Menghani FXStreet

The GBP/JPY cross retreats sharply from the 200.25 region or the vicinity of its highest level since July 2024 amid the emergence of heavy selling around the British Pound (GBP) during the early European session on Tuesday. Spot prices, however, manage to retain the positive bias and currently trade just above mid-199.00s.

The yield on long-dated UK bonds rose to the highest since 1998, putting further pressure on Prime Minister Keir Starmer's government to take steps to regain the confidence of markets. Apart from this, a modest US Dollar (USD) recovery overshadows the Bank of England's (BoE) cautious rate cut last month and contributes to the Sterling Pound's (GBP) underperformance. This turns out to be a key factor that fails to assist the GBP/JPY cross to capitalize on its intraday gains.

Meanwhile, the uncertainty over the likely timing of the next interest rate hike by the Bank of Japan (BoJ) is seen weighing on the Japanese Yen (JPY). Apart from this, a stable performance around the equity markets contributes to the heavily offered tone around the safe-haven JPY and assists the GBP/JPY cross to stick to its positive bias for the second straight day. This, in turn, warrants some caution before confirming that spot prices have topped out and positioning for deeper losses.

There isn't any relevant market moving economic data due for release from the UK on Tuesday, leaving the GBP at the mercy of the price action in bond markets. Meanwhile, the market focus will remain glued to BoE's Monetary Policy Report Hearings on Wednesday, which will play a key role in providing some meaningful impetus and influencing the near-term GBP/JPY price dynamics.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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