GBP/JPY extends rally to six days as rising Oil prices weigh on Yen

• GBP/JPY climbs to its highest level since early February as rising Oil prices weigh on the Yen.
• Middle East tensions and supply disruption fears keep pressure on Japan’s energy-dependent economy.
• A wide interest rate gap between the BoE and BoJ supports GBP/JPY.

The British Pound (GBP) strengthens against the Japanese Yen (JPY) on Monday, with GBP/JPY extending its rally for a sixth consecutive day as rising Oil prices continue to weigh on the Yen. At the time of writing, the cross is trading around 214.87, its highest level since February 4.

The Yen remains under broad pressure as escalating tensions in the Middle East keep Crude Oil prices elevated, reinforcing concerns over Japan’s trade balance, given its heavy reliance on energy imports.

In the latest developments, US President Donald Trump ordered a naval blockade targeting Iranian ports after US-Iran talks over the weekend concluded without a breakthrough, raising concerns about prolonged supply disruptions.

While both the UK and Japan are net energy importers, Japan is far more exposed to supply shocks, given that a significant share of its energy imports comes from the Middle East. This leaves the Japanese economy more vulnerable to prolonged disruptions and rising input costs, increasing downside risks to growth.

For the Bank of Japan (BoJ), higher energy costs are feeding into inflation, which in theory supports the case for further policy normalization. However, the risk that sustained high Oil prices could weigh on domestic demand and economic activity may prompt policymakers to proceed more cautiously, potentially slowing the pace of tightening.

BoJ Governor Kazuo Ueda said on Monday that the economy and price trends are broadly evolving in line with the central bank’s forecasts, while noting that underlying inflation is gradually moving toward the BoJ’s target. He added that risks to inflation remain two-sided, but warned that a sustained rise in inflation expectations driven by geopolitical tensions could push underlying inflation higher.

On the UK side, the Bank of England (BoE) faces a more challenging trade-off, as higher energy costs risk adding to already persistent price pressures, making it harder for inflation to return to the 2% target. This limits the scope for rate cuts, with expectations growing that interest rates could remain higher for longer or even rise further if inflation proves sticky.

Against this backdrop, GBP/JPY continues to find support from the wide interest rate gap between the UK and Japan. However, the upside remains sensitive to broader Yen dynamics, with USD/JPY hovering near the 160.00 level, a zone that has previously triggered intervention from Japanese authorities, which could limit further gains in the cross if policymakers step in.