BoE BoJ Divergence And War Driven Inflation
Support for the pound came from expectations that the Bank of England could raise rates as early as April, due to inflation concerns tied to the Iran war. The yen weakened after National CPI fell to its lowest level since March 2022, reducing expectations of an immediate Bank of Japan rate rise. Higher energy prices linked to the war were also seen as a headwind for Japan’s growth and the yen. Potential intervention by Japanese authorities was cited as a factor limiting further gains in GBP/JPY. The pair has rebounded from 100-day SMA support near 207.25, last tested in February. A sustained move above 213.00 was referenced as a possible trigger for further upside. S&P Global’s Composite PMI ranges from 0 to 100, with 50.0 indicating no monthly change. Readings above 50 suggest expansion, while below 50 indicate contraction.Looking Back At March 2025
Looking back at the analysis from this time last year, in March 2025, the bullish sentiment for GBP/JPY was strong as it approached the 212.70 area. The core belief then was that a hawkish Bank of England would continue to diverge from a dovish Bank of Japan. This view was heavily reliant on inflation fears stemming from the Middle East conflict at the time. We recall the Bank of England’s hawkish stance in early 2025, which did lead to a rate hike that April. However, inflation has since cooled significantly, with the latest UK CPI figures from February 2026 showing a drop to 2.5%, and the S&P Global Composite PMI has softened to 51.5, indicating slowing growth. This shift has led markets to price in potential rate cuts later this year, capping the Pound’s upside. Conversely, the situation in Japan has evolved from the persistent weakness we saw in early 2025. With core inflation remaining above the 2% target for eighteen straight months, the Bank of Japan has finally shifted, raising its policy rate to 0.1% last quarter. This marks a significant departure from the dovish expectations of last year. The concerns from 2025 about Japanese authorities intervening proved to be well-founded, as we saw several rounds of intervention in the latter half of that year when the cross threatened the 215.00 level. Those war-driven energy price spikes also moderated faster than anticipated, removing a key source of pressure on the Japanese economy. This has created a more stable, two-way market compared to the one-sided bullishness of last year. Given this new environment, the aggressive bullish bets on GBP/JPY from early 2025 are no longer justified. Traders should now consider strategies that benefit from range-bound price action or a potential decline, such as selling out-of-the-money call options to collect premium. The previous upward momentum has clearly stalled, and the policy divergence that once drove the pair higher is now reversing. Create your live VT Markets account and start trading now.
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