- GBP/JPY continues losing ground for the third straight day and drops to a two-week low.
- Expectations for a hawkish shift by the BoJ underpin the JPY and exert some pressure.
- The BoE’s dovish outlook weighs heavily on the GBP and contributes to the sharp decline.
The GBP/JPY cross extends the previous day’s bearish breakdown momentum below the 160.00 psychological mark and remains under heavy selling pressure for the third straight day on Thursday. The downward trajectory picks up pace after the Bank of England announced its policy decision and drags spot prices to a two-week low, around mid-157.00s.
The British Pound weakens across the board in reaction to a dovish assessment of the BoE’s policy outlook and turns out to be a key factor dragging the GBP/JPY cross lower. In the accompanying policy statement, the UK central bank removed the phrase that they would “respond forcefully, as necessary”. Furthermore, BoE Governor Andrew Bailey said that inflation will continue to fall this year and more rapidly during the second half of 2023. This, in turn, suggests that the BoE might be nearing the end of the current rate-hiking cycle amid looming recession risks and weighs on the GBP.
The Japanese Yen (JPY), on the other hand, is drawing support from expectations that high inflation may invite a more hawkish stance from the Bank of Japan (BoJ) later this year. The bets were lifted by recent data, which showed that Nationwide core inflation in Japan reached its highest annualized print since December 1981. This is seen as another factor exerting downward pressure on the GBP/JPY cross. That said, a goodish intraday recovery in the equity markets acts as a headwind for the safe-haven JPY and assists the cross to bounce back to the 158.00 round-figure mark in the last hour.
The fundamental backdrop, meanwhile, seems tilted firmly in favour of bearish traders and suggests that the path of least resistance for the GBP/JPY cross is to the downside. Hence, any subsequent recovery might still be seen as a selling opportunity and runs the risk of fizzling out rather quickly.