GBP/JPY extends sharp reversal back from multi-year peaks above 168.00, eyes test of 160.00

• GBP/JPY’s sharp reversal back from multi-year highs above 168.00 printed at the start of last week extended on Tuesday.
• The pair shed another 1.6%, taking its three-day run of losses to nearly 4.0%.
• Risk-off flows, lower UK yields, receding BoE tightening bets and worrying UK government borrowing data in 2021/22 are all weighing.

GBP/JPY’s sharp reversal back from multi-year highs above 168.00 printed at the start of last week extended on Tuesday, with the pair shedding another 1.6%, taking its three-day run of losses to nearly 4.0%. At current levels just above 160.50, the pair now trades over 4.5% below last week’s multi-year peaks and has nearly erased the entirety of its monthly gains.

The ongoing reversal lower in GBP/JPY is being driven by a combination of bearish factors. The risk-sensitive pair is being weighed by continued selling pressure in global equity markets as investors fret about globally rising interest rates and how this might impact long-term growth. Meanwhile, UK yields have reversed sharply lower in tandem with some of their global peers, reducing the UK’s yield advantage over the yen and weighing on the pair.

Meanwhile, many analysts have for some time been warning that expectations for BoE monetary tightening this year (money markets were last pricing a further six 25 bps hikes) are overly excessive. The BoE has been coming across as more and more concerned about UK economic weakness as a result of the ongoing cost-of-living squeeze, concerns which will only have risen in wake of last week’s week UK Retail Sales figures.

A paring back on BoE tightening bets thus might also be weighing on the pair. If risk appetite remains on the ropes in the coming sessions, GBP/JPY bears will likely be looking for a break under 160 and a test of key support in the upper 158.00s (the 50-Day Moving Average) and at 158.00 (the 2021 highs).

UK borrowing 20% higher than expected in 2021/22

Analysts also highlighted UK government borrowing data released on Tuesday as weighing on the pound, with government borrowing in the just ended 2021/22 fiscal year coming in 20% higher than forecast by the UK Office for Budget Responsibility (OBR) just one month ago.

Analysts said the data highlights the challenges faced by UK Chancellor Rishi Sunak. On the one hand, Sunak is under pressure to ease the impact of the most severe cost-of-living crisis in the UK in multiple decades. However, on the other, Sunak faces pressure to get UK government finances in order following a pandemic-related spending splurge in 2020 and 2021.