GBP/JPY pulls back from over one-week high, downside potential seems limited

The GBP/JPY cross rises to over a one-week high during the Asian session on Friday, albeit struggles to capitalize on the move and attracts some intraday selling near the 187.65 region. Spot prices retreat to the lower end of the daily range, around the 187.25 area in the last hour, and for now, seem to have snapped a three-day winning streak.

Growing acceptance that the Bank of Japan (BoJ) will certainly end its negative rate policy in the first few months of 2024, to a larger extent, offset softer domestic core consumer inflation figures. The headline and core rates of inflation in Japan, however, remain above the 2% target, reaffirming market bets for an imminent shift in the BoJ's policy stance. This, along with a weaker tone around the Asian equity markets, benefits the safe-haven Japanese Yen (JPY) and acts as a  headwind for the GBP/JPY cross.

Any meaningful downside, however, seems elusive as the Bank of England (BoE) Governor Andrew Bailey pushed back against market expectations for interest-rate cuts next year and warned that it was too early to declare victory over inflation. Speaking at a Treasury Select Committee hearing, Bailey predicted that monetary policy will have to stay restrictive for quite some time to make sure that inflation gets back to the BoE’s 2% target. This could underpin the British Pound and lend support to the GBP/JPY cross.

This, along with the better-than-expected release of the flash UK PMIs on Thursday, warrants caution for aggressive bearish traders. In fact, the Services and Composite indices rose to 50.5 and 50.1, respectively, indicating economic expansion. Meanwhile, the UK Manufacturing PMI remained in the contraction territory, though improved to 46.7 from 44.8 in October. This, in turn, makes it prudent to wait for some follow-through before positioning for any meaningful decline in the absence of any relevant UK macro data.

Technical levels to watch