GBP/JPY rebounded almost 100 pips from the day’s low, retracing Monday’s modest bearish gap at the open and pushing to a fresh intraday peak near 213.70 in early European trade. An initial bout of volatility linked to reports that UK Prime Minister Keir Starmer could announce his resignation as soon as today faded quickly, as the Japanese Yen weakened more broadly.
Pressure on the Yen was tied to fears that Japan’s economy will stay strained by the Middle East conflict and ongoing energy supply disruption through the Straight of Hormuz, which outweighed concerns about official intervention and a more hawkish Bank of Japan stance. Japan’s Finance Minister Satsuki Katayama said on Monday that authorities stand ready to respond appropriately to currency moves at any time, while minutes of the April BoJ meeting showed some members favoured faster rate rises to prevent underlying inflation from overshooting. BoJ Deputy Governor Himino reiterated that rate hikes will continue based on economic, price and financial trends, yet the Pound found limited support as UK political turbulence and a firm US Dollar tone curbed appetite for a more forceful recovery from last week’s one-month trough.
Yen Weakness and Political Risk Drive Volatility
We see the move towards 213.70 as driven almost entirely by yen weakness, not sterling strength. The potential resignation of the Prime Minister introduces significant downside risk for the pound. Consequently, one-week implied volatility on sterling options has spiked over 15%, reflecting deep uncertainty in the market.
The yen’s weakness is fundamentally tied to the ongoing conflict impacting the Strait of Hormuz, which handles over 20% of global petroleum liquids. With Brent crude futures recently pushing past $115 a barrel, Japan’s May 2026 trade deficit widened considerably due to soaring energy import costs. This economic strain is overriding any verbal threats of currency intervention from officials.
Carry Trade Appeal and FX Strategy Implications
While the Bank of Japan talks of future rate hikes, the interest rate differential remains the dominant factor for traders. The Bank of England’s base rate at 5.0% against the BoJ’s 0.25% makes funding trades by selling the yen highly profitable. This carry trade appeal is likely to keep a floor under pairs like GBP/JPY for the foreseeable future.
Given the binary risk of UK politics, we are avoiding outright spot positions and favouring options strategies. Buying long-dated GBP/JPY call options allows for participation in further yen-driven upside while capping downside risk from a sterling collapse. For the immediate term, purchasing straddles is a viable strategy to profit from the expected sharp price move, regardless of the direction following any political announcement.
