GBP/JPY stays strong around 214.30 after the Bank of Japan decided to keep the interest rate at 0.75%. In December, Japan’s CPI excluding fresh food eased to 2.4%, matching predictions. As the currency nears its multi-year high, the Bank of Japan opts not to change rates and focuses on slowly expanding its monetary policy. Prime Minister Sanae Takaichi plans to dissolve the lower house for a snap election.

Japan’s Inflation Trends

In December, Japan’s CPI increased by 2.1% compared to the previous year, down from 2.9% in November. The Pound stays steady as the UK awaits new Retail Sales and S&P Global PMI data. Retail Sales are expected to decline by 0.1% in December, but the Bank of England is likely to continue its gradual easing policy. The Japanese Yen has weakened due to differences in policies with other key central banks. Since 2013, the Bank of Japan has used a loose monetary policy to boost the economy and increase inflation. This strategy led to the Yen’s depreciation, but interest rates went up in 2024 due to rising inflation pressures. The shift away from an ultra-loose policy began after inflation exceeded the Bank of Japan’s 2% target. Rising global energy prices and salary increases in Japan are affecting economic stability.

Implications of Monetary Policies

The main point is the widening gap between the Bank of Japan (BoJ) and the Bank of England (BoE). The BoJ is keeping rates at 0.75%, while the BoE is expected to cut rates. This creates a strong case for a continued GBP/JPY uptrend, aiming for levels above 214.30. The BoJ’s decision to maintain the current rate was expected, especially with core inflation at 2.4%. This suggests a new steady phase following the series of gradual rate hikes during 2024 and 2025, which started when negative rates ended. The BoJ may wait for clearer signs of wage growth, like the strong “Shunto” wage negotiation results of 2024, before any further increases. Conversely, the Pound Sterling is under pressure due to expectations for BoE easing. The predicted third consecutive monthly drop in retail sales continues a trend of consumer weakness; UK retail sales fell by 2.4% in 2024. This ongoing weakness provides the BoE with a solid reason to lower interest rates soon, which may apply more pressure on the Pound against other currencies. Given this situation, buying call options on GBP/JPY with strikes around 215.00 seems wise for the next few weeks. The anticipated snap election in Japan, called by Prime Minister Takaichi, will add volatility, making options a safer choice than holding long positions, as our risks are clearer. This volatility may also offer better entry points for our trades. We should monitor the upcoming UK flash PMI data for January closely. If the results show unexpected strength in the UK economy, it might prompt markets to rethink the timing of BoE rate cuts and cause a sudden, though temporary, drop in the pair. However, as long as the broader trend of BoJ inaction and BoE easing continues, we view any dips as buying opportunities. Create your live VT Markets account and start trading now.

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