GBP/JPY trades with modest losses below mid-183.00s, bullish potential seems intact

• GBP/JPY remains under some selling pressure for the second successive day on Friday.
• The risk-off mood, along with intervention fears, benefit the JPY and weigh on the cross.
• The divergent BoE-BoJ policy outlook favours bullish traders and should help limit losses.

The GBP/JPY cross struggles to capitalize on the previous day's goodish recovery from the 182.50 area, or the weekly low and meets with a fresh supply during the Asian session on Friday. Spot prices currently trade around the 183.35 region, down only 0.10% for the day, and remain well within the striking distance of the highest level since December 2015 touched on Wednesday.

Worries about a global economic slowdown, along the worsening US-China relations, continue to weigh on investors' sentiment, which is evident from a generally weaker tone around the equity markets. Apart from this, the potential risk of intervention by Japanese authorities lends some support to the safe-haven Japanese Yen (JPY). The British Pound (GBP), on the other hand, is undermined by fears that more aggressive interest rate hikes by the Bank of England (BoE) could push the UK economy into recession. This, in turn, exerts some pressure on the GBP/JPY cross, though any meaningful corrective decline still seems elusive.

Market participants seem convinced that BoJ's negative interest-rate policy will remain in place at least until next year. Adding to this, BoJ Deputy Governor Shinichi Uchida, as reported by the Nikkei newspaper, said on Friday that the central bank will maintain its yield curve control (YCC) policy from the perspective of sustaining ultra-loose monetary conditions. This pours cold water on speculations about a change in the BoJ's policy outlook, fueled by data that Japan's nominal base salary grew at the fastest pace in 28 years in May. This could push inflation higher, which has exceeded the 2% goal for more than a year.

In contrast,  the markets are currently pricing in the possibility of a further 130 bps of tightening by the BoE through to the turn of the year. Moreover, BoE Governor Andrew Bailey last week justified the decision of a jumbo 50 bps lift-off on June 22 and said that rates could remain at peak levels for longer than traders currently expect. This marks a big divergence in comparison to a dovish stance adopted by the BoJ and suggests that the paht of lease resistance for the GBP/JPY cross is to the downside. Hence, any subsequent downfall might still be seen as a buying opportunity and is more likely to remain cushioned.

Technical levels to watch