GBP/JPY remains on the defensive near 157.00 mark, downside seems cushioned

• GBP/JPY witnessed some selling on Friday and extended the overnight modest pullback.
• The risk-off impulse benefitted the JPY’s relative safe-haven status and exerted pressure.
• The BoE-BoJ policy divergence should help limit any meaningful downfall for the cross.

The GBP/JPY cross remained depressed through the early European session and was last seen trading just a few pips above the daily low, around the 157.00 mark.

The cross extended the overnight modest pullback from the 158.00 round figure, or the highest level since October 2021 and witnessed some selling during the first half of the trading on Friday. The risk-off impulse in the markets underpinned the Japanese yen's relative safe-haven status and exerted some pressure on the GBP/JPY cross.

Growing market acceptance that the Fed will adopt a more aggressive policy response to combat high inflation triggered a fresh bout of the global risk aversion trade. This was evident from a sea of red across the equity markets, which, in turn, forced investors to take refuge in traditional safe-haven assets and benefitted the JPY.

On the other hand, the British pound was weighed down by a broad-based US dollar strength and failed to gain any respite from mixed UK macro releases. The UK Office of National Statistics reported that the economy contracted less than anticipated, by 0.2% in December, and expanded by 1% during Q4 2021 as against expectations for the 1.1% increase.

Separately, the UK Industrial/Manufacturing Production figures and a larger than estimated traded deficit did little to impress traders or provide any impetus to the GBP/JPY cross. The downside, however, remains cushioned, at least for now, amid the divergence between the Bank of England and the Bank of Japan monetary policy outlooks.

It is worth recalling that the BoE raised its benchmark interest rate by 25 bps last week – marking the first back-to-back hike since 2004. Adding to this, four out of nine MPC members voted for a more aggressive 50 bps hike in borrowing costs. Conversely, the BoJ has repeatedly said that it would retain its ultra-loose monetary policy.

The fundamental backdrop still seems tilted in favour of bullish traders. This, in turn, warrants some caution before confirming that the recent strong move up from the 200-day SMA has run out of steam. That said, tensions over the Northern Ireland protocol of the Brexit agreement might hold back traders from placing fresh bullish bets around the GBP/JPY cross.

Technical levels to watch