GBP/JPY recovers from one-week low, back above 156.00 on Lavrov's comments

• GBP/JPY attracted some dip-buying on Monday and recovered a major part of its intraday losses.
• A turnaround in the risk sentiment undermined the safe-haven JPY and extended some support.
• The lack of any strong follow-through buying warrants some caution for aggressive bullish traders.

The GBP/JPY cross managed to rebound nearly 100 pips from the one-week low touched earlier this Monday and was last seen trading with only modest losses, around the 156.25 region.

The cross extended last week's retracement slide from the vicinity of 2021 high, or levels just above the 156.00 mark and witnessed heavy selling during the first half of the trading on Monday. Tensions over the Northern Ireland protocol of the Brexit agreement, along with Friday's disappointing UK GDP report turned out to be a key factor that undermined the British pound. This, along with the risk-off impulse in the markets, benefitted the safe-haven Japanese yen and exerted additional pressure on the GBP/JPY cross.

That said, a more hawkish Bank of England policy decision should help limit any deeper losses for sterling. It is worth recalling that the BoE raised the benchmark interest rate by 25 bps and the vote distribution showed that four out of nine MPC members backed a more aggressive 50 bps increase in borrowing costs. Apart from this, strong intraday recovery in the equity markets acted as a headwind for the JPY, which helped limit any deeper losses for the GBP/JPY cross and attract fresh buying near the 155.30 area.

The latest comments by Russia's Foreign Minister Sergey Lavrov helped ease worries about an imminent Russian invasion of Ukraine. Lavrov told Russian President Vladimir Putin in a meeting on Monday that the US had put forward concrete proposals on reducing military risks and that he could see a way to move forward with talks. He, however, warned that indefinite talks are not possible, but there was always a chance for agreement. This gave the market some comfort, which was evident from a turnaround in the risk sentiment.

It will now be interesting to see if bulls are able to capitalize on the move or the intraday uptick is seen as an opportunity to initiate fresh bearish positions around the GBP/JPY cross. Hence, it will be prudent to wait for strong follow-through buying before confirming that the recent corrective pullback has run its course. Market participants now look forward to Tuesday's release of the UK jobs report for a fresh impetus.

Technical levels to watch