GBP/JPY retreats from the 172.00 area to session lows sub-170.50

• The pound fails at 172.00 and drops below 170.50.
• Fed hike hopes and risk aversion weigh on the pound.
• The yen picks up as market sentiment deteriorates.

The pound is pulling back from long-term highs above 172.00, weighed by a broad-based USD strength and a sourer market sentiment. The pair has retreated about 0.5% on the day, to reach session lows at 170.35 so far.

The pound loses momentum with the US Fed on focus

Last week’s moderately positive market sentiment seems to have waned on Monday, with the investors in a more cautious mood ahead of the US Fed’s monetary policy decision. The bank is widely expected to hike rates by 75 basis points for the fourth consecutive time on Wednesday, which has provided a fresh boost to the USD.

Furthermore, the market seems to have digested Rishi Sunak’s appointment as British prime minister, which propelled the pound more than 2% higher against the yen last week.

This week, the focus has turned to the Bank of England’s monetary policy decision, due on Thursday. The BoE is also expected to hike rates by 0.75%, although the new cabinet, which has calmed the markets, coupled with the weak UK economic perspectives are feeding expectations of a somewhat softer tightening cycle in 2023.

In the Asian session, the positive Japanese retail sales, which rose beyond expectations in September, and the downbeat Chinese manufacturing data, also JPY-supportive on the back of its safe haven status, have increased downside pressure on the GBP.

Technical levels to watch