GBP/JPY retreats to mid-215.00s; downside seems limited ahead of BoE on Thursday

GBP/JPY drifts lower on Wednesday as a bullish US Dollar exerts some pressure on the GBP.
Economic risks due to Middle East tensions undermine the JPY and lend support to the cross.
BoE rate hike bets keep the GBP on the back foot and contribute to limiting any further losses.

Haresh Menghani FXStreet

The GBP/JPY cross attracts fresh sellers on Wednesday and stalls the previous day's goodish bounce from the weekly low, levels just below the 215.00 psychological mark. Spot prices remain depressed near mid-215.00s during the early European session, though the lack of follow-through selling warrants some caution for bearish traders.

The US Dollar (USD) retains its reserve currency status amid the uncertainty over US-Iran peace talks and exerts some pressure on the British Pound (GBP), which, in turn, is seen weighing on the GBP/JPY cross. The Japanese Yen (JPY), on the other hand, continues with its struggle to attract any meaningful buyers amid economic concerns stemming from Middle East tensions and should limit any meaningful downfall for the currency pair.

Investors remain worried that Japan's economy will come under substantial strain as the risk to energy supplies remains due to continued disruptions to shipping through the Strait of Hormuz. In fact, traffic through the strategic waterway has seen a sharp decline due to Iran's restrictions on movements and the US naval blockade of Iranian ports. This counters the Bank of Japan's (BoJ) hawkish tilt and keeps the JPY bulls on the back foot.

As was widely anticipated, the Japanese central bank kept its benchmark interest rate unchanged at 0.75% at the conclusion of a two-day meeting. However, the 6-3 vote split, with three BoJ board members calling for a rate hike, along with an upward revision of inflation forecasts, keeps a June or July rate hike firmly on the table. This, along with intervention fears, could limit JPY losses and cap the GBP/JPY cross ahead of the central bank event.

The Bank of England (BoE) is scheduled to announce its decision on Thursday amid bets for at least two rate hikes by the end of this year. Moreover, traders are currently pricing in a 70% chance of tightening in June. Hence, the outlook will play a key role in influencing the GBP and the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through selling before confirming that spot prices have topped out near the 216.00 mark.

Economic Indicator

BoE Interest Rate Decision

The Bank of England (BoE) announces its interest rate decision at the end of its eight scheduled meetings per year. If the BoE is hawkish about the inflationary outlook of the economy and raises interest rates it is usually bullish for the Pound Sterling (GBP). Likewise, if the BoE adopts a dovish view on the UK economy and keeps interest rates unchanged, or cuts them, it is seen as bearish for GBP.

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