GBP/JPY pulls back from six-year highs at 164.85 amid pre-long weekend profit-taking

GBP/JPY hit fresh more than six-year highs on Thursday, eclipsing Wednesday’s 164.84 peak by about one pip. However, despite a sharp rise in US, UK and global developed market bond yields (apart from in Japan), the pair was not able to muster a convincing bullish break towards 165.00. Rather, the pair on Thursday slipped back to test the 164.00 level once again and at current levels in the 164.40s, trades with losses of about 0.2% on the day.

The lack of bullish momentum could have something to do with the risk-off tone to US equity market trade – typically, GBP/JPY is correlated to other risk assets like US stocks. It could have something to do with the fact that, since the start of the month, GBP/JPY has already put in a solid nearly 3.0% rally from the sub-160.00 levels, and was thus due some profit-taking/consolidation.

It could have something to do with currency trading volumes dropping off somewhat on Thursday ahead of a long week in North American and European markets, which are closed on Friday for Easter festivities. Whatever the reason, Thursday’s consolidation is unlikely to be the start of a broader reversal back towards recent lows in the 160.00 area.

Most developed market central banks, including the BoE, remain in inflation-fighting mode, which means the trajectory for short-term interest rates and government bond yields likely remains to the upside. Japan, with its still very low inflation, remains the exception, keeping the yen vulnerable to widening yield differentials and BoJ/rest of G10 central bank policy divergence.

For sure, this week’s robust UK labour market data and spicy UK Consumer Price Inflation reports keep the BoE very much on track for more rate hikes in the near term. When proper trading flows come back next week, GBP/JPY is likely to have a go at pushing above 165.00.