GBP/JPY retreats from cycle highs stabilizing around 174.50

• On Monday's session, the GBP/JPY traded at the 174.36 - 175.77 range, setting a fresh cycle high.
• Rising US yields and weak Japanese data weigh on the Yen.
• Investors eye UK labor-market data due on Tuesday.

The GBP/JPY soared to a fresh cycle high of 175.77 and then turned course to negative territory finding support at the 174.50 area. In that sense, rising US bond yields and dovish bets on Bank of Japan’s (BoJ) decision on Friday apply further pressure on the Yen. Markets await labor-market data from the UK on Tuesday and US inflation. 

Labor market data from the UK set to shape next BoE decision

For Tuesday’s session, labor-market data from the UK is anticipated to show that the number of individuals claiming jobless benefits decreased by 9.6K in May, compared to the previous figure of 46.7 K. The unemployment rate is projected to increase slightly to 4%, while average earnings, both including and excluding bonuses, are expected to accelerate during the same period. As central banks tend to have a “full employment” policy, the health of the labor-market is closely followed by policymakers and hence shapes the expectation of their decisions.

That being said, Bank of England´s (BoE) Jonathan Haskel highlighted the importance of closely monitoring inflation momentum and persistence, indicating the possibility of further interest rate hikes to counter inflation risks. In addition, Catherine Mann showed on Monday her concerns with sticky core inflation figures and added that she is waiting for an “analysis of data” to decide the next vote. In that sense, the hawkish stance from the BoE provides traction for the Pound Sterling.

On the other hand, Japan's PPI contracted by 0.7% MoM in May, exceeding the expected decline of 0.2%, while Machine Tool Orders saw a substantial contraction of 22%. These weak economic data and slowing inflation have raised expectations for a more dovish stance from Governor Ueda and policymakers, indicating a preference for accommodative monetary policies. WIRP (World Interest Rate Possibilities) suggests a less than 10% chance of a policy liftoff for Friday’s BoJ meeting, with probabilities increasing to 55% by December.

GBP/JPY Levels to watch

According to the daily chart, the GBP/JPY holds a neutral to the bullish outlook for the short term as the bulls seemed to have taken a step back after being rejected at the overbought area. However, technical indicators remain positive, indicating that the market may be preparing for another leg up.

If GBP/JPY manages to move higher, the next resistances to watch are at the daily high at 175.75, followed by the 176.00 area and the 176.50 zone. On the other hand, if the cross loses ground, immediate support levels are seen at the 174.45 area, followed by the 174.00 zone and the 20-day Simple Moving Average (SMA) at 173.10.

GBP/JPY Daily chart