Fundamentals of the GBP/JPY

GBP/JPY gains traction for the second consecutive day on Monday, hitting a three-week high early in the European session. Price quotes currently sit in the 182.80-182.85 area, indicating a rebound of over 650 points from Friday's low touched on June 13. There is a heavy supply tone surrounding the Japanese Yen (JPY).

Japan's currency is under pressure from an unscheduled purchase of Japanese government bonds (JGBs) by the Bank of Japan on Monday. YCC policy was loosened on Friday by the BoJ as a result of a sharp rise in yields of benchmark 10-year JGBs to a nine-year high, the first such move since February 2022. The Japanese central bank says that 0.5% is intended to be a reference, not a rigid limit, on 10-year government bonds (JGB).

Despite Kazuo Ueda's dovish remarks, investors appear disappointed by his comments reiterating the need for continued monetary support. During the post-meeting press conference, Ueda noted that the central bank will not hesitate to ease policy further, stating that it will need more time to reach the 2% inflation target. In combination, this weakens the safe-haven JPY, undermining the GBP/JPY cross as well as strengthening the bullish sentiment across the global equity markets.

Despite data showing that business activity in the world's second-largest economy declined further in July, investors remain optimistic about more stimulus measures from China. A risk-on environment remains supported by growing acceptance that the Federal Reserve is nearing the end of its fastest rate hike cycle since the 1980s. Another factor contributing to British Pound's relative outperformance is the Bank of England's (BoE)'s potential to hike interest rates more frequently.

On August 3, the UK central bank is widely expected to raise its benchmark interest rate by 25 basis points, to 5.25%. As price pressures persist, the markets have priced in two more BoE rate hikes this year. As a result, the GBP/JPY cross shows greater upside potential than BoJ's dovish stance. A sustained strength and acceptance above mid-183.00s support a further upward move in the near term.