The GBP/JPY pair has been on a descending trajectory this week from its highest point since July 2024. Verbal interventions have provided a lift to the Japanese Yen, pushing GBP/JPY lower. Currently, the pair trades around the 203.25 level, down 0.20% for the day, although it is still poised for weekly gains amidst Japan’s fiscal concerns.

Sanae Takaichi’s Unexpected Victory

Sanae Takaichi’s unexpected victory in Japan’s LDP leadership race increases speculation about a more expansionary fiscal policy, impacting interest rate expectations from the Bank of Japan. Takaichi and Finance Minister Kato’s comments have helped stabilise the JPY by discouraging drastic declines, while monitoring currency movements closely. Economic advisors believe Japan may see another rate hike in the near future given the sustained inflation and economic growth.

The cautious market sentiment further supports the JPY, limiting GBP/JPY’s decline. Nevertheless, expectations of the Bank of England holding rates at 4% due to signs of inflation and economic resilience support the GBP. A heat map illustrates the percentage movements of the Japanese Yen against other major currencies, highlighting its resilience, particularly against the New Zealand Dollar.

The recent verbal intervention from Japanese officials is causing a predictable pullback in GBP/JPY, creating short-term uncertainty for the pair. We have seen this pattern before, such as in late 2022, when similar warnings often preceded more significant market moves. This suggests that while the long-term trend might remain, immediate downside risks have increased.

Risk Factors in Strategy

The possibility of a Bank of Japan rate hike in December or January is now a central factor for our strategy. With Japanese core inflation having stayed above the 2% target for over three years, currently sitting at 2.4% as of last month’s data, the fundamental case for a hike is strong. This makes holding short JPY positions through the next BoJ meeting increasingly risky.

On the other side of the pair, the British Pound remains supported by a steadfast Bank of England. UK inflation remains stubbornly high, with the latest CPI figures showing a 3.6% annual rate, which reinforces the market view that rates will hold at 4.0% for the remainder of 2025. This strength in the pound should limit the downside of any JPY-driven correction.

Given the conflicting pressures, we believe implied volatility in GBP/JPY options is likely to rise in the coming weeks. Traders should consider buying volatility through strategies like long straddles or strangles, which profit from a large price move in either direction. This approach allows us to capitalize on the uncertainty surrounding the next BoJ policy decision without betting on a specific direction.

For those with a more bullish long-term outlook, this pullback could be a buying opportunity, but one that requires protection. We suggest using put options to hedge any new long positions in the spot or futures market. This allows participation in potential upside if the uptrend resumes while defining the risk should the verbal warnings translate into official intervention.

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