GBP/JPY remains depressed near daily low, lacks follow-through selling

• GBP/JPY struggles to capitalize on the previous day’s strong move up to the weekly high.
• A combination of factors offers support to the safe-haven JPY and exerts some pressure.
• Confusion over the BoE’s emergency bond-buying program weighs on the British pound.
• The BoJ-BoE policy divergence warrants caution before placing aggressive bearish bets.

The GBP/JPY cross attracts fresh selling near the 100-day SMA barrier on Thursday and reverses a part of the previous day's strong move up to the weekly high. The cross maintains its offered tone through the early European session and is currently hovering near the daily low, just above the mid-162.00s.

Speculations for more currency market intervention by Japanese authorities, along with the prevalent cautious market mood, help ease the recent bearish pressure surrounding the Japanese yen. This, in turn, is seen as a key factor exerting some downward pressure on the GBP/JPY cross. Japan's Finance Minister Shunichi Suzuki reiterated earlier this week that the government stands ready to intervene and respond appropriately to excess FX moves.

Moreover, Bank of Japan BoJ Governor Haruhiko Kuroda said on Wednesday that the government intervention last month to stop one-sided depreciating moves in JPY was quite appropriate. Meanwhile, the market sentiment remains fragile amid concerns about economic headwinds stemming from rapidly rising borrowing costs and geopolitical risks. Apart from this, a resurgence of COVID-19 cases in China fuels recession fears and tempers investors’ appetite for riskier assets.

The British pound, on the other hand, is pressured by the fact that the Bank of England could end its program of temporary gilt purchases on October 14 and concerns about the UK government's fiscal plans. The new UK government said that it would not reverse its vast tax cuts or reduce public spending. That said, speculations for a full 100 bps rate hike by the UK central bank offer some support to sterling and could limit losses for the GBP/JPY cross.

Adding to this, a big divergence in the policy stance adopted by BoJ (dovish) and other major central banks (hawkish) could lend support to the GBP/JPY cross. In fact, the Japanese central bank has shown no inclination to hike interest rates and remains committed to continuing with its monetary easing. Furthermore, Japan's Prime Minister Fumio Kishida said that the BoJ needs to stick to its ultra-lose policy until wages rise, warranting caution for bearish traders.

Technical levels to watch