The GBP/JPY pair has been falling this week after reaching its highest level since July 2024. Comments from officials have boosted the Japanese Yen, causing GBP/JPY to decrease. The pair is currently at about 203.25, down 0.20% for the day, but it may still end the week with gains due to concerns over Japan’s fiscal situation. ### Sanae Takaichi’s Unexpected Victory Sanae Takaichi’s surprise win in Japan’s LDP leadership race has sparked talk of a more spending-friendly fiscal policy, affecting interest rate expectations from the Bank of Japan (BoJ). Takaichi and Finance Minister Kato have released comments that support the Yen by preventing sharp declines, while also keeping a close eye on currency changes. Economic advisors predict that Japan might raise rates soon, thanks to ongoing inflation and economic growth. The cautious mood in the market is helping the Yen, which limits the fall of GBP/JPY. At the same time, the Bank of England is expected to maintain its rates at 4% due to signs of inflation and a robust economy, which supports the British Pound. A heat map shows how the Yen has moved against other major currencies, highlighting its strength, especially against the New Zealand Dollar. Recent comments from Japanese officials have led to a predictable dip in GBP/JPY, introducing short-term uncertainty for the pair. This pattern has emerged before, as seen in late 2022 when similar warnings often came before bigger market swings. This indicates that while the long-term trend may continue, immediate risks are growing. ### Risk Factors in Strategy The potential for a Bank of Japan rate increase in December or January is now a key element of our strategy. Since Japanese core inflation has stayed above 2% for more than three years—and is currently at 2.4%—it strongly supports a rate hike. Holding short positions in Yen before the next BoJ meeting is starting to look risky. On the other hand, the British Pound is benefitting from a stable Bank of England. UK inflation is still high, with the latest CPI showing a 3.6% annual rate. This contributes to the belief that rates will remain at 4.0% through 2025, helping to limit any declines caused by the Yen’s movement. Given these mixed pressures, we expect implied volatility in GBP/JPY options to rise in the coming weeks. Traders should think about buying volatility using strategies like long straddles or strangles, which profit from big price movements in either direction. This allows us to take advantage of the uncertainty around the next BoJ decision without predicting the exact direction. For those with a more positive long-term view, this pullback might present a buying opportunity, but it requires protection. We recommend using put options to safeguard any new long positions in the spot or futures market. This way, you can benefit from potential gains if the uptrend resumes while managing the risk if verbal warnings turn into official actions. Create your live VT Markets account and start trading now.

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