GBP/JPY trades just below its highest level since December 2015 ahead of UK macro data

• GBP/JPY pulls back from a fresh multi-year high touched during the Asian session on Wednesday.
• A softer risk tone benefits the safe-haven JPY and prompts some profit-taking around the cross.
• The divergent BoJ-BoE policy outlook helps limit the downside ahead of the UK macro data dump.

The GBP/JPY cross eases from its highest level since December 2015 touched on Wednesday and trades with a mild negative bias through the first half of the Asian session, though lacks follow-through. The cross currently trades around the 176.65-176.70 area and seems poised to prolong its recent upward trajectory witnessed over the past month or so.

The pre-Fed anxiety tempers investors' appetite for riskier assets, which drives some haven flows towards the Japanese Yen (JPY) and acts as a headwind for the GBP/JPY cross. The downside, however, remains in the wake of a big divergence in the Bank of Japan (BoJ and the Bank of England (BoE) monetary policy outlooks. In fact, the markets seem convinced that the BoJ will stick to its dovish stance to support the economy and ensure that the recent positive signs are sustained. The expectations were reaffirmed by BoJ Deputy Governor Masazumi Wakatabe on Monday, saying that there are overwhelming cases for the continuation of the ultra-easy monetary policy measures.

In contrast, the Bank of England (BoE) is anticipated to be far more aggressive in policy tightening to contain stubbornly high inflation and hike interest rates by 25 bps on June 22. The bets were reaffirmed by the upbeat UK employment details released on Tuesday, which, so far, has shown little signs of cooling off. The UK Office for National Statistics (ONS) reported that the ILO Unemployment Rate unexpectedly dipped to 3.8% in the quarter to April from the 3.9% previous. Furthermore, the Claimant Count Change also showed a bigger-than-expected decline of 13.6K in May. Adding to this, the jump in UK wages, which is a key driver of inflation, poses the biggest concern for the BoE.

Commenting on the UK jobs data before the House of Lords Economic Affairs Committee, BoE Governor Andrew Bailey noted that the UK labor market is very tight and recovering slowly. Separately, BoE policymaker Catherine Mann said on Tuesday that wage increases of 4.0% would be a challenge to returning CPI to 2.0%. This, in turn, suggests that the fight against inflation is not over yet and supports prospects for a further near-term appreciating move for the GBP/JPY cross. Market participants now look forward to the UK macro data dump, including the monthly GDP print, for some meaningful trading opportunities. The focus will then shift to the BoJ monetary policy meeting on Friday.

Technical levels to watch