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10 Mar 2023

GBP/JPY trims a part of BoJ-inspired rally, faces rejection near 200-day SMA

  • GBP/JPY struggles to capitalize in the intraday move up and fails near the 200-day SMA.
  • The BoJ’s decision to leave policy settings unchanged weighs on the JPY and lends support.
  • The mixed UK macro data and the risk-off environment keeps a lid on any further gains.

The GBP/JPY cross attracts fresh sellers near a technically significant 200-day Simple Moving Average (SMA) on Friday and its goodish intraday rally from sub-162.00 levels. Spot prices surrender a major part of the Bank of Japan (BoJ)-inspired gains and retreat to mid-162.00s during the early part of the European session.

The Japanese Yen (JPY) weakens across the board in a knee-jerk reaction to the BoJ's decision to keep monetary policy settings unchanged at the end of a two-day meeting on Friday. This, in turn, assists the GBP/JPY cross to regain positive traction and build on the previous day's bounce from the 161.60 area, or a nearly two-week low. The uptick gets an additional boost following the release of better-than-expected UK GDP print, which showed that the economy expanded by 0.3% in January as compared to the 0.5% contraction recorded in the previous month.

That said, the UK Manufacturing and Industrial Production contracted more-than-anticipated last month, which, in turn, holds back traders from placing aggressive bullish bets around the British Pound. Apart from this, the prevalent risk-off environment - as depicted by a sea of red across the global equity markets - drives some haven flows towards the JPY and further contributes to capping the upside for the GBP/JPY cross. This, in turn, warrants some caution before positioning for the resumption of the recent upward trajectory witnessed since early February.

The downside, meanwhile, seems limited amid expectations that the BoJ will stick to its dovish stance to support the fragile domestic economy. The bets were lifted by this week's release of the final GDP print from Japan, which showed that the economy narrowly averted a recession in the final quarter of 2022 and reaffirmed continued weakness in the economy. Moreover, the incoming BoJ Governor Kazuo Ueda recently stressed the need to maintain the ultra-loose policy settings and said that the central bank isn't seeking a quick move away from a decade of massive easing.

The aforementioned mixed fundamental backdrop makes it prudent to wait for a sustained move in either direction before positioning for the near-term trajectory for the GBP/JPY cross.

Technical levels to watch

 

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