Central Bank Expectations Shift
Markets have reduced expectations for near-term Bank of England easing. Futures now price a 20–30% chance of a 25 bps cut in March, down from about 80% before the conflict. Traders also no longer fully price two BoE cuts in 2026. They see less than a 50% chance of one 25 bps cut by the end of the year. For the Bank of Japan, expectations for the next rate rise have moved back as officials weigh the impact of higher oil prices on growth. Japan’s reliance on imported energy makes it more exposed to higher fuel costs. Markets expect the BoJ to keep rates unchanged at the March meeting. The next hike timing remains unclear.Policy Signals And Market Risks
Reuters reported Seisaku Kameda said the BoJ could raise its policy rate to 1.0% from 0.75% as early as April if tensions ease this month. If the conflict continues and volatility stays high, he said a move may be delayed to around June or July. Japan’s government said it is monitoring yen moves. Finance Minister Satsuki Katayama said officials will “respond nimbly” and that BoJ policy targets price stability, not exchange rates. The escalating US-Iran conflict is the primary driver we must watch, pushing oil prices higher and creating broad market uncertainty. Brent crude futures have now surged past $115 per barrel, a level not seen since the energy crisis of 2022, directly impacting global inflation outlooks. This persistent geopolitical risk keeps the pressure firmly on central banks and their upcoming decisions. For us, this means the Bank of England is very unlikely to cut interest rates in the near future, which continues to support the Pound. The latest UK inflation data for February surprised many by rising to 3.1%, reinforcing the view that the BoE will remain on hold to combat these price pressures. Consequently, the market has almost completely priced out any significant rate cuts for the remainder of 2026. Conversely, these high energy costs are damaging for Japan’s economy, making it difficult for the Bank of Japan to justify raising its own interest rates. As a major energy importer, the sustained surge in oil acts like a tax on Japanese consumers and businesses, likely delaying the BoJ’s next move until at least mid-year. This widens the already large interest rate gap between the UK and Japan, making the GBP/JPY carry trade very compelling. Given this environment, buying GBP/JPY call options for the coming weeks appears to be a logical strategy. This allows traders to profit from any further rise in the currency pair while capping the potential loss to the premium paid on the option. It is a defined-risk way to maintain a long position as ongoing tensions could easily push the pair higher. However, we must also be prepared for a sudden reversal, making it wise to consider protective put options as a hedge against sharp downturns. A surprise de-escalation in the Middle East or direct currency intervention from Japanese authorities could trigger a rapid fall in GBP/JPY. Looking back to 2025, we recall that Japanese officials acted decisively when the currency weakened past key levels, a risk that remains very real today. Create your live VT Markets account and start trading now.
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