British Pound holds steady following UK GDP as Yen draws support from intervention risks

• Persistent JPY selling underpins GBP/JPY, keeping the cross steady on Thursday.
• Mostly positive UK economic figures fail to draw GBP bulls off the sidelines as a sharp USD rally counters their impact.
• The threat of intervention restrains further JPY declines and limits gains in the cross.

Upbeat UK economic releases elicit little response from GBP/JPY, which recovers from a small intraday decline to regain the 212.00 level in early European trading on Thursday. The cross nevertheless stays within the range established over the past week or so. Continued selling of the Japanese Yen (JPY) provides support, although the risk of intervention remains.

The UK economy expanded by 0.7% over July to September, according to the first quarterly estimate of Gross Domestic Product (GDP) published by the Office for National Statistics (ONS). Annual growth reached 1.9%, a marked acceleration from  1.4% YoY in the preceding quarter. Separate UK releases put September's increase in Industrial Production at 0.3% and the rise in Manufacturing Production at 0.7%, with both exceeding market forecasts. Despite these figures, the British Pound (GBP) finds no relief as the US Dollar (USD) strengthens.

Even as expectations of additional Bank of Japan (BoJ) tightening strengthen, the JPY remains an underperformer. A rise in Japan's Corporate Goods Price Index (CGPI), the first in three months, has reinforced those expectations. Yet sizeable interest rate gaps between Japan and other major economies, including the UK, continue to encourage the so-called carry trade and weigh on the JPY. With the BoJ policy rate at 1.25% and the Bank of England (BoE) having raised its base rate to 4.00%, the nominal differential stands at 275 basis points (bps), maintaining the GBP's yield advantage.

A warning against excessive FX volatility from Japan's top currency diplomat, Atsushi Mimura, has heightened the risk of intervention, discouraging JPY bears from taking aggressive positions. Although this constrains GBP/JPY, the fundamental backdrop still appears firmly favourable to buyers. Further buying would, however, be required to strengthen the case for additional gains. Any corrective retreat might nonetheless be regarded as a buying opportunity and is more likely to remain limited.