GBP/JPY taps 183.00 mark for the first time since December 2015, recession risks cap gains

• GBP/JPY touches a fresh multi-year top on Tuesday, albeit lacks follow-through.
• The BoJ’s dovish stance, a positive risk tone undermine the JPY and lends support.
• Looming recession risks act as a headwind for the GBP and cap gains for the cross.

The GBP/JPY cross climbs to a fresh high since December 2015 during the early European session on Tuesday, with bulls now awaiting a sustained move beyond the 183.00 mark before placing fresh bets.

The Japanese Yen (JPY) continues with its relative underperformance in the wake of a big divergence in the monetary policy stance adopted by the Bank of Japan (BoJ) and other major central banks. In fact, the markets seem convinced that BoJ's negative interest-rate policy will remain in place at least until next year. Moreover, BoJ Governor Kazuo Ueda recently ruled out the possibility of any change in ultra-loose policy settings. The, along with a generally positive risk tone, further undermines the safe-haven JPY and acts as a tailwind for the GBP/JPY cross.

Investors turned optimistic after China's Premier Li Qiang told delegates at the World Economic Forum in Tianjin that economic growth in the second quarter will be higher than the first and is expected to reach the annual projected target of around 5%. Apart from this, a modest pickup in demand for the British Pound (GBP), bolstered by the prevalent US Dollar (USD) selling, turns out to be another factor lending support to the GBP/JPY cross. The upside, however, remains capped on the back of fears that the British economy is heading for a recession.

The market concerns mounted sharply following a surprise 50 bps rate hike by the Bank of England (BoE) last Thursday. Investors also seem worried that further increases in rates to combat high inflation will spark a mortgage crisis and raise borrowing costs for government debt. This is holding back traders from placing aggressive bullish bets around the Sterling. Apart from this, speculations that Japanese authorities may intervene again to support the domestic currency further contribute to keeping a lid on any further gains for the GBP/JPY cross.

It is worth recalling that Japan's top currency diplomat Masato Kanda stepped up warnings against the recent weakness in the JPY. Adding to this, Japanese Finance Minister Shunichi Suzuki said we will continue to watch the forex market with a sense of urgency and would respond appropriately if currency moves became excessive. This is holding back traders from placing aggressive bullish bets around the GBP/JPY cross. Nevertheless, the aforementioned fundamental suggests that the path of least resistance for spot prices is to the upside.

Technical levels to watch