The GBP/JPY pair has dropped to around 207.30 due to strong selling pressure on the British Pound. This drop follows Japan’s Tankan survey for the fourth quarter, which revealed an increase in the Large Manufacturing Index to 15, the highest in four years. This week, the Bank of Japan is likely to raise interest rates by 25 basis points to 0.75%. This expectation has boosted the Japanese Yen, overshadowing the British Pound, which is waiting for UK labor market data.

UK Employment Predictions

Forecasts for the UK’s employment figures indicate that the unemployment rate may rise to 5.1%, with average earnings growth—excluding bonuses—at 4.5%. These figures could lead the Bank of England to lower interest rates by 25 basis points to 3.75%. The anticipated rate cut from the Bank of England would respond to weak labor demand and decreasing inflation. This situation sets the stage for possible shifts in monetary policy in both Japan and the UK. With GBP/JPY trending downward near 207.00, our focus is on the differing monetary policies expected this week. The strong data from Japan’s Tankan survey reinforces our view that the Bank of Japan is poised to raise rates to 0.75%. This decision continues the normalization of policy that began when the BoJ ended its negative interest rate policy in March 2024. Japan’s stance is supported by inflation data that has remained above the central bank’s 2% target for much of the past two years. In contrast, the Bank of England is set to lower its rate to 3.75% on Thursday, reflecting a notable slowdown in the UK economy and reduced price pressures from earlier highs in 2023, when inflation peaked over 11%.

Strategic Considerations For Traders

We are observing a classic setup for ongoing weakness in the GBP/JPY pair as we approach the new year. Traders should consider strategies that benefit from a further decline, such as buying GBP/JPY put options to hedge or speculate on a drop below 207.00. The upcoming UK labor market data is crucial, as unemployment is expected to rise to 5.1%, up from just 4.2% in late 2023. This increase highlights a weakening job market, giving the BoE more room to cut rates, strengthening the case for a weaker Pound Sterling against a stronger Yen. With both central bank meetings happening this week, we anticipate significant volatility for the currency pair. Options traders should be aware that the price of puts may rise due to increased implied volatility. Therefore, establishing positions before these announcements could be beneficial, while managing risk appropriately. Create your live VT Markets account and start trading now.

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