What is GBP/JPY?
The GBP/JPY pair is one of the most liquid currency pairs in the world of forex trading. The Japanese yen (JPY) and British pound (GBP) are the third and fourth most traded currencies, respectively. The exchange rate between these two popular currencies shows how much one British pound is worth in Japanese yen. For example, if the GBP/JPY exchange rate is 181.80, this means that 181.80 Japanese yen is equivalent to 1 British pound.
Also known as the Quid, the British pound is a primary reserve currency, like the US dollar and the euro. This means that central banks and international institutions hold significant amounts of pound sterling and euro as part of their foreign exchange reserves. The British pound plays a vital role in facilitating international trade and investment activities. With the Bank of England (BoE) being the gatekeeper of financial stability, the UK has a reputation for maintaining a stable economy and prudent monetary policy. This perception could enhance the attractiveness of the pound among investors and traders.
The Japanese yen’s history spans more than 150 years. It stands out for having exceptionally low-interest rates that promote economic growth. Because it is easy to borrow yen at low-interest rates to fund higher-yielding initiatives, the JPY has become the world's financing currency. The yen is an appealing currency for international investors due to Japan's current account surplus and reputation for economic stability.
What affects the price of the GBP/JPY pair?
The GBP/JPY pair can be highly volatile and affected by a variety of factors, such as:
- Political stability: Political stability, elections, referendums, and trade disputes can affect investor sentiment and impact the exchange rate of the GBP/JPY pair. For example, Brexit, the process of the United Kingdom's withdrawal from the European Union, has significantly influenced the pricing of the GBP against other currencies. In Japan, political tensions with neighbouring Asian nations could increase market volatility and lead to changes in the pair's value.
- Commodity prices: Japan is one of the world's most industrialised nations and a major player in international commerce and finance. Its exports, particularly automobiles and electronics, add to the yen's importance and depend on crude oil imports. As a result, the yen's price is highly associated with the price of crude oil. When the price of oil rises, the yen declines (inverse correlation) and the GBP/JPY value rises (positive correlation).
- Macroeconomic factors: Economic indicators such as interest rates, inflation rates, Gross Domestic Product (GDP) growth, employment data, and the trade balances of both the United Kingdom and Japan can impact the exchange rate. Higher interest rates, stronger economic growth, and favourable economic data typically attract foreign investors, leading to an increase in demand for the currency and potentially strengthening its value.
- Central Bank policies: The monetary policy decisions made by the BoE and the Bank of Japan (BOJ) can have a direct impact on the GBP/JPY exchange rate. It can include interest rate changes, quantitative easing programmes, and forward guidance, which can influence the currency's attractiveness to investors.
What to watch out for when trading GBP/JPY?
When trading the GBP/JPY forex pair (the British pound against the Japanese yen), keep an eye out for announcements from key influential organisations in both countries. These include:
- Bank of England (BoE) and Bank of Japan (BOJ) announcements for interest rates and shifts in monetary policy
- Natural disasters affecting Japan
- UK economic data (GDP, inflation, employment, manufacturing/services Purchasing Managers Index (PMI), consumer sentiment)
- Statistics Bureau of Japan (SBJ) for data on Trade Balance, unemployment rate, Consumer Price Index (CPI), and Gross Domestic Product (GDP)