GBP/JPY softened towards 213.00 on Wednesday as Sterling weakened after UK Prime Minister Keir Starmer said he would step down as Labour leader and Prime Minister. The move injects fresh political uncertainty into the UK outlook, with nominations for the Labour leadership due to start on 9 July, and markets monitoring whether any successor signals changes to fiscal policy, borrowing plans or broader economic priorities.
The economic backdrop remains soft. S&P Global’s UK Composite PMI edged down to 49.4 in June from 49.7 in May, staying below 50.0 for a second month; the Services PMI fell to 48.7 from 49.3, the weakest in 41 months, while the Flash UK Manufacturing Output Index rose to 53.6 from 52.2. On the four-hour chart, the cross traded at 213.02 under the 20-period SMA at 213.45 and the 100-period SMA at 214.31, with RSI around 41. Resistance is seen at 213.25 and 213.45, then 214.31, while support sits at 212.77 and 212.54.
Impact Of Political Uncertainty On Sterling’s Outlook
Given the political uncertainty in the UK, we believe the British Pound will remain under pressure. The resignation of the Prime Minister introduces significant unpredictability regarding future fiscal policy, creating a bearish environment for Sterling. We see this as an opportunity to position for further downside in GBP/JPY over the next several weeks.
This political instability is happening alongside a weakening economy, as shown by the S&P Global UK Composite PMI falling to 49.4. With the latest UK CPI data showing inflation remains sticky at 2.8%, the Bank of England is in a difficult position, unable to cut interest rates to support growth. This combination of political turmoil and stagflationary pressures reinforces our negative outlook on the Pound.
Strategy And Technical Considerations
In response, we are looking to purchase GBP/JPY put options with expirations in late July to capitalize on this expected move. One-month implied volatility has already increased to 11.8% from 9.5% last week, indicating the market is pricing in larger price swings. Using options allows us to define our risk while gaining exposure to potential Sterling weakness.
From a technical standpoint, any rally toward the 213.45 resistance area should be seen as a selling opportunity. We will use this zone, which aligns with the 20-period moving average, to initiate bearish positions. Our initial target is the support level at 212.54, with a break below that suggesting a deeper decline is likely.
We’ve seen this before, as the Pound fell over 10% in the weeks following the 2016 Brexit vote due to similar political uncertainty. The market’s reaction to the 2022 mini-budget crisis also serves as a reminder of how sensitive Sterling is to perceived fiscal instability. This historical precedent supports our view that the current situation poses a significant risk to the currency’s value.
