- GBP/JPY plummets to over a two-month low in reaction to the BoJ’s hawkish twist on Tuesday.
- A dovish outlook, however, caps gains for the JPY and assists spot prices to recover a few pips.
- The fundamental backdrop favours bearish traders and supports prospects for further losses.
The GBP/JPY cross comes under intense selling pressure on Tuesday and plunges to its lowest level since October 12 in reaction to the Bank of Japan's hawkish twist. Spot prices, however, manage to recover around 150 pips and jumps back above the 162.00 mark during the early European session.
The Japanese Yen rallies across the board after the Japanese central bank announced its monetary policy decision, which, in turn, prompts aggressive selling around the GBP/JPY cross. In an unexpected move, the BoJ widened the allowable trading band for the 10-year government bond yield to 50 bps on either side of the 0% target from the 25 bps previous. This is seen as a step towards the policy normalisation process, which, in turn, provides a strong boost to the JPY.
The BoJ, however, sticks to its dovish guidance and pledges to ramp up monetary stimulus as needed. The central bank also projects that interest rates will move at current or lower levels. In the post-meeting press conference, BoJ Governor Haruhiko Kuroda said that Japan's economy still faces a lot of uncertainty and sees inflation growth fading in 2H 2023. This caps the upside for the JPY and assists the GBP/JPY cross to attract some buyers near the 160.80-160.75 area.
Any meaningful recovery, however, still seems elusive, warranting some caution for bullish traders. The prevalent risk-off mood, amid growing recession fears, should continue to benefit the JPY's relative safe-haven status. Apart from this, a dovish outcome from the Bank of England meeting last week, with two MPC members voting to keep interest rates unchanged, might undermine the GBP. This, in turn, acts as a headwind for the GBP/JPY cross and keep a lid on the intraday uptick.
Even from a technical perspective, a convincing break below the very important 100 and 200-day SMAs favours bearish traders and supports prospects for the emergence of fresh sellers at higher levels. Hence, any subsequent move up could be seen as a selling opportunity and runs the risk of fizzling out quickly in the absence of relevant economic data from the UK.
Technical levels to watch
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