GBP/JPY struggles near one-week low, just below 161.00 mark amid risk-off mood

The GBP/JPY cross surrenders its modest intraday gains and drops to a one-week low, below the 161.00 round-figure mark during the early European session.

Investors remain concerned about the UK government's fiscal policy, which continues to undermine the British pound amid looming recession risks and acts as a headwind for the GBP/JPY cross. In fact, UK Prime Minister Liz Truss last week defended the tax-cut plan and said that cutting taxes is the right thing to do morally and economically. This could derail the Bank of England's efforts to contain high inflation and force it to turn more hawkish, creating headwinds for the economy.

Apart from this, the prevalent risk-off environment benefits the Japanese yen's relative safe-haven status and further contributes to capping the GBP/JPY cross. The market sentiment remains fragile amid growing worries about a deeper global economic downturn and geopolitical risks, which is evident from a weaker tone around the equity markets. That said, thin trading volumes on the back of a holiday in Japan help limit the downside for the GBP/JPY cross, at least for the time being.

Moreover, a big divergence in the monetary policy stance adopted by the Bank of Japan and other major central banks should keep a lid on any meaningful upside for the JPY. This, in turn, warrants caution before positioning for an extension of the recent pullback from a three-week high, around the 165.70 area touched last Wednesday. In the absence of any major market-moving economic releases on Monday, the broader risk sentiment will be looked upon for some impetus around the GBP/JPY cross.

Technical levels to watch