Sterling doesn’t move in a vacuum. Understanding what’s driving it is the starting point for managing what it costs you. This is a guide to three currency pairs commonly affecting UK businesses.
GBP/EUR
For UK businesses with European operations, the pound/euro rate is often where the largest currency risk sits. It’s spread across supplier payments, customer receipts and payroll rather than sitting in one visible place.
What drives this pair is primarily the policy gap between the Bank of England and the European Central Bank. When the two are cutting or raising rates at different speeds, the rate tends to reflect that divergence. UK inflation and growth data also feed directly into it, often shifting the rate ahead of any formal policy change.
The figures to watch: BoE Monetary Policy Committee decisions, UK CPI releases, and Eurozone PMI data.
GBP/USD
GBP/USD is sensitive to a wider range of external factors than most sterling pairs. Federal Reserve decisions, US inflation data, shifts in global risk appetite, and US trade policy all feed directly into it, none of which a UK finance team can influence or control. US tariff announcements in early 2025 were cited by institutions including the IMF as contributing to heightened FX volatility, with the dollar moving sharply as markets reacted to rising trade uncertainty, and political uncertainty in the US has become a standing feature of this pair’s behaviour rather than an occasional one.
The figures to watch: Fed rate decisions and forward guidance, US non-farm payrolls, and US trade policy developments. Dollar strength and sterling weakness tend to happen simultaneously when markets are under pressure.
GBP/JPY
GBP/JPY combines sterling’s sensitivity to UK economic data with the yen’s role as a global safe-haven currency, which means it can move sharply on events that have nothing to do with the UK or Japan directly.
The Bank of Japan’s policy shift adds a further layer of complexity. After more than a decade of near-zero rates, the BoJ raised benchmark rates to 0.75% in December 2025 and has signalled its intention to continue adjusting rates. For businesses with Japanese supplier or customer relationships, the yen they’re pricing today is operating under materially different monetary conditions than it was two years ago.
When global markets are stressed, yen strength can move GBP/JPY quickly and in ways that aren’t obviously connected to anything happening in the UK economy.
The figures to watch: BoJ policy announcements, UK economic data, and global risk sentiment.
What to do with this
Knowing what drives a rate doesn’t tell you where it’s going. What it does is make the risk visible, and visible risk is the starting point for managing it rather than absorbing it.
Disclaimer:
This publication is provided for general information purposes and does not constitute legal, tax or other professional advice from Lumon or its subsidiaries, and it is not intended as a substitute for obtaining advice from the relevant professional services. We make no representations, warranties or guarantees, whether expressed or implied, that the content in the publication is accurate, complete or up to date.
Lumon Pay Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Electronic Money Institution (FRN: 902022). Lumon Risk Management Ltd, trading as Lumon, is authorised by the Financial Conduct Authority as an Authorised Payment Institution (FRN: 567835) for the provision of payment services and is also authorised and regulated by the Financial Conduct Authority as an investment firm (FRN: 671108)
