GBP/JPY fell for a second day on Wednesday as the Pound weakened amid rising political uncertainty in the UK. The pair traded near 213.08 after an intraday high around 213.70, down about 0.15% on the day.
Pressure on Prime Minister Keir Starmer increased after Labour’s heavy losses in last week’s local elections. Reports said more than 80 Labour MPs called for Starmer to resign, and four cabinet ministers have stepped down.
Uk Political Uncertainty Builds
UK Health Secretary Wes Streeting was reported as a possible challenger, while Starmer said he will not resign. People close to Starmer reportedly said he is ready to face Streeting in a leadership contest.
The fall in GBP/JPY was limited as the Yen struggled amid Middle East tensions and higher Oil prices, which weigh on Japan as an energy importer. Traders are pricing in two more Bank of England rate rises by year-end, while the Bank of Japan is expected to tighten gradually.
On the daily chart, price is below the 20-day SMA near 214.30 and is moving towards the lower Bollinger Band. The upper band sits near 216.66, the RSI is in the mid-40s, and the ADX is in the mid-20s.
Resistance is around 214.29, then 216.66. Support is near 211.94, with a drop below it pointing to a deeper pullback.
Key Drivers And Risk Factors
We remember the political uncertainty surrounding the Prime Minister in mid-2025, which created some notable but brief dips in Sterling. That specific leadership challenge faded, but the broader theme of UK political fragility continues to introduce volatility, making any long positions vulnerable to sharp pullbacks. This has been a recurring pattern over the last twelve months.
The fundamental story, however, remains the wide interest rate difference, which is the main reason this pair has trended higher. Following the Bank of England’s final rate hike to 5.75% in late 2025, the market is now pricing in at least two rate cuts before the end of this year as UK inflation has finally fallen to 2.5%. Yet, with the Bank of Japan’s policy rate still at only 0.25%, the positive carry for holding GBP/JPY remains substantial.
Given this conflict between a strong long-term carry trade and short-term political or rate-cut risks, traders should consider using options to define their risk. Buying long-dated GBP/JPY call options can provide exposure to further upside from the rate gap while capping potential losses if UK political drama or a surprisingly dovish BoE statement triggers a sell-off. The VIX for sterling, a measure of expected volatility, has recently climbed to 9.8 from a low of 8.1, suggesting the market is pricing in more chop.
We must also be mindful of intervention from Japanese authorities, a risk that has become more pronounced as the pair has stayed elevated above 210. We saw what was likely stealth intervention around the 219 level last month, which caused a rapid 200-pip drop before the uptrend resumed. For derivatives traders, these events present a risk of sudden price gaps but also a tactical opportunity to enter positions on the dip.
