GBP/JPY stayed above 213.00 in Thursday’s Asian session and remained near a one-month high retested earlier this week. Price action was largely steady, with support for the pair coming from broader market conditions. Rising energy prices linked to the Iran war raised concerns about Japan’s growth and inflation outlook. This increased references to a possible stagflation setup, which could complicate the Bank of Japan’s policy normalisation and has weighed on the yen.

Bank Of Japan Signals And Market Caution

BoJ Governor Kazuo Ueda said on Tuesday that underlying inflation is expected to accelerate moderately and that policy will be guided to achieve the inflation target with wage gains. The yen saw limited support from these remarks, while caution persisted due to fears of official action in markets. Japan’s Vice Finance Minister for International Affairs, Atsushi Mimura, said the government may consider measures on all fronts regarding foreign exchange volatility. At the same time, a stronger US dollar and limited demand for sterling helped restrain further gains in GBP/JPY. UK CPI published on Wednesday reinforced the Bank of England’s hawkish stance. The BoE signalled last week that an interest rate rise could come as early as April, supporting sterling and keeping the uptrend in place. Looking back at 2025, we saw the fundamental case for a higher GBP/JPY play out, with the cross breaking well above the 213.00 handle mentioned at the time. The pair continued its ascent through the latter half of last year, driven by the Bank of England’s rate hikes. However, the dynamics that fueled that strong uptrend are now showing clear signs of changing.

Shifting Central Bank Divergence

The Bank of England’s hawkish stance, a key pillar of support last year, has softened considerably. Recent data showed the UK economy contracted by 0.2% in the final quarter of 2025, and with February’s inflation figures cooling to 3.5%, rate cuts are now being priced in for the second half of 2026. This has capped Sterling’s strength, making further gains in the cross more difficult. On the other side of the pair, the Bank of Japan finally moved away from its negative interest rate policy in January 2026, a landmark shift. While Japan’s own economic data remains tepid, this move has narrowed the extreme policy divergence that previously punished the yen. Furthermore, we remember the multiple FX interventions by Japanese authorities in late 2025, which show they are willing to defend the currency against excessive weakness. Given that the primary driver of the trend—central bank divergence—is now reversing, the strategy of simply holding long positions is becoming riskier. We believe buying volatility is now the more prudent approach, using instruments like straddles to position for a potential sharp move as the market adjusts to this new reality. Implied volatility for GBP/JPY is currently near a six-month low of 8.2%, making options relatively inexpensive ahead of key economic data releases. Create your live VT Markets account and start trading now.

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