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Yes, that is the whole idea of Limp Mode. It limits you to first and second gear so you can limp slowly to the nearest garage without causing catastrophic damage to the engine. What you need to do is connect a good quality DTC code reader scan tool and see the real reason that Limp Mode has been engaged.
if your xj8 is the all alloy xj350 model which i am sure it will be at that year, if its petrol it is under the plastic under floor panel on the lh side of the car as you sit in the car. the panel goes all the way down the lh floor pan the filter is at the front part of it. if its a diesel its under the bonnet lh side and you will need to bleed the system after changing it by turning the ignition on/off with a few seconds pause in between each cycle about 10 times. hope this helps.
Is that the only wire with a metal boot? IDK, maybe it's an indicator for number one cylinder. I can't imagine any reason to put a metal boot rather than a rubber boot.
Pull
the carpet back in the right hand foot well, reach behind the foot well
side plate on the right and you will find a black, cylindrical device
with a rubber top. Press down on the rubber top with your finger and the
device is then reset
Check for a broken 12V+ or broken ground wire in the rubber boot that goes from the drivers door to the hinge pillar. Had this problem on mine and found both wires broken from years of flexing when door opened and closed. Don't try to splice the break, as the wire is too short and is also brittle. Run new (same guage) wire through the boot and splice inside the door and under the left side kick panel.
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