GBP/JPY bounces off two-week low and and 50 DMA, shows some resilience below 163.00 mark

The GBP/JPY cross extends this week's sharp downfall from levels just above mid-167.00s, or the highest since June 22 and continues losing ground for the third straight day on Friday. The downward trajectory drags spot prices to a nearly two-week low during the first half of the European session, though bulls show some resilience below the 163.00 mark.

The British pound's relative underperformance comes amid the worsening outlook for the UK economy, further fueled by Friday's disappointing macro data. The UK Office for National Statistics reported that monthly Retail Sales recorded the biggest fall since December 2021 and fell much more than expected in August. This, in turn, adds to fears about an imminent recession, which weighs heavily on sterling and exerts downward pressure on the GBP/JPY cross.

Apart from this, the risk-off impulse drives some haven flows towards the Japanese yen and aggravates the bearish pressure surrounding the cross. The rapidly rising interest rates, along with headwinds stemming from fresh COVID-19 curbs in China and the protracted Russia-Ukraine war, have been fueling concerns about a deeper global economic downturn. This tempers investors' appetite for riskier assets, which is evident from a fresh leg down in the equity markets.

The ongoing downfall, meanwhile, seems rather unaffected by a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks. In fact, the BoJ lags behind other major central banks in the process of policy normalisation and remains committed to continuing with its monetary easing. This has been a key factor behind the recent slump in the JPY witnessed since the early part of this year, and probably explains the gentle uptrend in the GBP/JPY cross.

From a technical perspective the pair has just touched down on the 50-day Simple Moving Average (SMA), at 163.20 and this may explain why bulls are coming in to prop up price. The longer-term trend is gently bullish so though the current short-term trend is down, traders should act with caution before aggressively shorting the market. A daily close or open below the 50 DMA would give impetus to the down move, however, and see bears prepare to push price down to the lower boundary of a long-term channel and the 200 SMA at around 160.00. At that level bulls would once again be expected to enter the fray in force to make another stand. 

It will now be interesting to see if bearish traders can maintain their dominant position as the focus now shifts to next week's key central bank event risks. Both the BoJ and the Bank of England are scheduled to announce their respective policy decision on Thursday. The outcome will play a key role in influencing the GBP/JPY cross and help determine the next leg of a directional move.

Technical levels to watch