British Pound retreats as bulls look past hawkish BoE; weak Yen appears to limit downside

• Broad USD strength weighs on GBP, leaving GBP/JPY unable to build on a modest advance.
• A weaker JPY and the BoE’s hawkish policy stance could underpin the cross by containing GBP losses.
• JPY bulls remain cautious as the timing of the BoJ’s next interest rate increase remains unclear.

An advance towards 212.15-212.20 on Wednesday has drawn renewed selling in GBP/JPY, sending the cross back towards the bottom of its daily range in the first half of the European session. With spot trading near 211.70, the fundamental picture nevertheless suggests caution for traders considering aggressive bearish positions.

Expectations of more aggressive policy tightening by the Federal Reserve (Fed) have supported broad gains in the US Dollar (USD). The resulting pressure on the British Pound (GBP) is holding back GBP/JPY, although the Bank of England’s (BoE) hawkish stance could contain further sterling losses. Speaking on Tuesday, BoE Deputy Governor Clare Lombardelli said additional interest rate rises remained likely given high energy prices and the resilience of the UK economy.

September marked a 10th consecutive monthly decline in Japan’s household spending, figures published on Tuesday showed, making the Bank of Japan’s (BoJ) plans for further interest rate rises more difficult. Together with the prevailing appetite for risk, this is seen as weighing on the safe-haven Japanese Yen (JPY) and should underpin GBP/JPY. Before positioning for a significant near-term decline, it would therefore be prudent to await strong follow-through selling.

Thursday’s batch of UK economic releases, including the preliminary Q3 GDP estimate, is the next focus for traders. Until then, the supportive factors outlined above suggest buyers could emerge on dips to lower levels. Fresh bullish positions, however, would require sustained gains and acceptance above resistance at the technically important 100-day Simple Moving Average (SMA), which currently stands near the 213.00 round-number level.