GBP/JPY bounces at 160.00 as risk appetite stabilises, yen bears eye upcoming BoJ meeting

• GBP/JPY bounced at the key 160.00 level on Wednesday as risk appetite stabilised and is now back above 161.00.
• Analysts had warned of a technical correction following the recent unusually large 4.5% drop between last Thursday and Monday.

GBP/JPY is enjoying a much overdue bounce on Wednesday and was last trading higher by about 0.9% on the day in the 161.30s, having reversed an earlier session dip under the 160.00 level to fresh monthly lows. The pair is getting some tailwinds from broader a modest improvement in broader risk appetite after some stabilisation was seen in European equity markets and with US bourses trading higher. The yen is underperforming as a result.

Analysts had warned that the near 4.5% drop between last Thursday and Monday was an unusually large move in such a short period of time, and that some consolidation would likely be in order. But FX strategists think that risks remain tilted towards the downside for GBP, amid growing concerns about the UK economy and a market has been pulling back recently on BoE tightening bets.

Against the likes of the US dollar and euro, where the risks are tilted towards their respective central banks become more hawkish not less, GBP is likely to continue to struggle. But the performance of GBP/JPY may ultimately rest on the yen. Recall that prior to the last week or so, the yen had been getting absolutely battered across the board given BoJ insistence that it not deviate from its current ultra-dovish monetary policy stance.

The BoJ will be announcing monetary policy during the upcoming Thursday Asia Pacific session and is likely to reiterate this message, which risks reigniting yen weakness. Traders betting on this might have thus seen the retest of 160.00 as a golden opportunity to reload on longs to target a retest of recent multi-year highs above 168.00. After all, even if the BoE isn’t going to live up to market tightening expectations, at least it is going to do some tightening (unlike the BoJ).