The GBP/JPY exchange rate climbed to about 201.70 during early European trading on Monday. This rise followed Japan’s Liberal Democratic Party selecting Sanae Takaichi, who is poised to become the country’s first female Prime Minister. Traders’ views have shifted, now lowering the chances of a Bank of Japan rate hike in October. Current overnight index swaps indicate a nearly 25% likelihood of a rate increase, down from 60% prior to the leadership vote.

Concerns in the UK Labor Market

The UK labor market presents challenges that may limit the growth of GBP/JPY. A recent survey by the Bank of England showed that companies expect no employment growth, marking the first time this has occurred since November 2020. Historically, the Bank of Japan has played a key role in shaping the Yen’s value through its monetary policies. The differences in policy between Japan and the US have mainly influenced the Yen’s strength. However, the gap has decreased since 2024, offering some support to the currency. The Japanese Yen often strengthens during times of market stress because it is considered a safe haven. This quality leads it to gain against currencies seen as riskier during turbulent times. Sanae Takaichi’s win in the LDP leadership election is causing notable weakness in the Japanese Yen. Her policy stance likely opposes further monetary tightening from the Bank of Japan. As a result, the GBP/JPY exchange has jumped past 201.50, a level not seen since summer 2024.

Rate Hike Speculation and Economic Data

In response, traders have quickly changed their expectations for a Bank of Japan rate hike this month. Overnight index swaps now show the chance of a 10-basis-point increase at the October 31st meeting has dropped to below 25%, down from over 60% just a week ago. This adjustment suggests that options betting on a weaker Yen, like buying GBP/JPY, are becoming more popular. Nevertheless, any further rise in the exchange rate may be restricted by concerns regarding the UK labor market. The latest data from the Office for National Statistics, released on September 15th, unexpectedly showed the UK’s unemployment rate rising to 4.5%. This reinforces the expectation that the Bank of England will likely maintain interest rates for the rest of 2025. Current price movements resemble the period from 2022 to 2023, when widening interest rate gaps primarily drove Yen weakness. The difference between the UK 10-year Gilt yield and the Japanese 10-year Government Bond has increased to over 420 basis points. This disparity makes holding Sterling more appealing than the Yen, lending support to the exchange rate. As GBP/JPY approaches the significant psychological level of 202.00, we anticipate higher volatility. One-month implied volatility in the options market has risen to 9.8%, indicating that traders expect larger price fluctuations ahead of the parliamentary vote on October 15th. This suggests that strategies designed to benefit from major price movements could be effective in the coming weeks. Create your live VT Markets account and start trading now.

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