The GBP/JPY exchange rate increased to 205.96 after hitting a low of 205.20. This rise was influenced by reduced fear in the market and a successful Japanese bond auction. Governor Ueda of the Bank of Japan hinted at possible interest rate hikes in December, which had previously strengthened the Yen. On Tuesday, the Pound started off strong against the Yen, recovering from losses incurred during Monday’s sell-off. Despite a positive response to Japan’s bond auction, cautious market sentiment has limited the Pound’s gains, with the rate staying close to 205.85.

Bank of England Financial Stability Report

The Bank of England released its Financial Stability report on Tuesday, warning about the risks of a stock market crash due to inflated AI company valuations and high debt financing. However, this had little effect on the Pound. Both the UK and Japan had a quiet economic day, but speculation about the Bank of Japan’s future monetary policies is likely to bolster the Yen. The value of the Japanese Yen is influenced by Japan’s economic performance and five key factors, including the Bank of Japan’s policy and bond yield differences with the U.S. The Yen is seen as a safe haven asset, which means it tends to strengthen in times of market stress, highlighting its reliability for investors. The recent increase in GBP/JPY towards 206.00 seems to be a temporary response to a smooth bond auction. However, the bigger story may be the potential for a Bank of Japan rate hike this month. Currently, overnight index swaps indicate an 85% chance of a 10-basis-point hike at the BoJ meeting on December 19th.

Impact of Governor Ueda’s Comments

Governor Ueda’s remarks are significant, especially in light of last week’s Tokyo Core CPI data for November, which reported 2.8%. This figure is well above the BoJ’s target of 2% and marks the 19th consecutive month of high inflation. This ongoing inflation is pushing the central bank to reconsider its long-standing loose monetary policy. On the other hand, the Pound appears increasingly vulnerable. The Bank of England’s stability report highlighted stretched asset valuations, and recent GDP data from October 2025 indicated a slight contraction of 0.1%. This divergence suggests the BoE may consider rate cuts in early 2026 while the BoJ moves towards tightening. Given these fundamental shifts, we see the current strength in GBP/JPY as a chance to brace for a decline. Following the significant rally from 2023 through 2024, conditions for a major correction are falling into place. Traders should explore options strategies that benefit from a drop in the pair, as volatility is expected to rise leading up to the BoJ’s decision. Create your live VT Markets account and start trading now.

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