GBP/JPY fell as the market adjusted, and weaker UK PMI data put slight pressure on the currency pair. The exchange rate was around 211.45 after briefly going above 212.00 earlier in the Asian session. In December, the UK’s Composite and Services PMIs dropped to 51.4 from 52.1 in November. Although demand is low, input costs rose quickly, which might slow down the Bank of England’s easing. The Bank of Japan (BoJ) is moving toward normalizing its policy with expectations of future rate hikes. Changes in the BoJ’s policy have affected the Yen’s value, especially since other central banks have raised rates to combat high inflation. The Yen had weakened due to the previous ultra-loose monetary policy, but the BoJ raised interest rates in 2024, which is helping to reverse this trend. Rising inflation in Japan, partly due to higher energy prices and expected salary increases, also influences BoJ’s decisions.

Interest Rate Differential Keeps Bias Upwards

The interest rate gap between the UK and Japan keeps the overall GBP/JPY trend leaning upward. Initially, the Bank of Japan’s significant stimulus caused the Yen to decline, but recent policy shifts are lessening these effects. The recent drop in GBP/JPY below 212.00 directly results from weaker UK PMI data for December 2025, which showed a slowdown in economic activity. This indicates that the Pound’s upward momentum is facing challenges as the new year begins. Traders should be cautious about pursuing new highs in this pair for now. The economic slowdown is complicated by persistent inflation. In the latest UK CPI report for December 2025, inflation remained steady at 3.8%. The Bank of England is struggling to support a weakening economy while combating inflation. This situation suggests ongoing volatility, which could make long option strategies like straddles potentially profitable. On the flip side, Japan’s policy outlook for Yen weakness is less certain. With the latest Tokyo Core CPI data showing inflation at 2.3%, well above the Bank of Japan’s target, the likelihood of further interest rate hikes in 2026 is increasing. This makes shorting the Yen less appealing.

Narrowing Policy And Risk Management

The key factor affecting this pair, the wide interest rate differential, is starting to narrow, a trend we expect to continue into 2026. While being long GBP/JPY is still profitable, its attractiveness is waning, and the risks of sudden downturns are rising. Looking back at 2025, we see that this narrowing policy can trigger significant corrections. For those holding long positions through futures or forwards, it’s time to manage risk more actively. Consider tightening stop-loss orders or reducing position sizes to safeguard profits from a potential decline. The easy gains from the policy divergence may be behind us for now. Create your live VT Markets account and start trading now.

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